Consumer Insights | Why is Meituan still willing to "spare no effort" to win the competition despite a significant year-on-year increase in net profit?

Meituan announced its latest quarterly report, with performance exceeding expectations. Total revenue reached 86.6 billion yuan, a year-on-year increase of 18.1%, and net profit was 10.06 billion yuan, a significant increase of 87% year-on-year. The operating profit margin of its core business significantly improved, rising from 7.1% in the same period last year to 12.2%. However, the market was in a panic due to Wang Xing's strong statement during the conference call: Meituan will "spare no effort" to win the competition. As a result, it was unable to provide accurate performance guidance for the second quarter and the remainder of the year.

Source: Company Announcement

The market is very curious: how many resources will Meituan use to defend its market share in food delivery? How much profit margin remains in the food delivery business hidden beneath the army of delivery riders to sustain a war of attrition?

From my perspective, Meituan has three trump cards to engage in this "whatever it takes" food delivery competition.

1. Food delivery is actually very profitable

The first trump card is that Meituan's food delivery business has already turned from loss to profit, with a very good profit margin.

According to the last separate disclosure of food delivery business data by Meituan in Q1 2022, its food delivery operating profit margin was about 6.5%. By 2024, according to JP Morgan's research report on major global food delivery platforms, "Global Online Takeaway (2024)," Meituan's food delivery business operating profit margin has reached an astonishing 17.4%.

We can also see from social media that Meituan, as a platform, charges commission fees from different merchants in the range of 15-30%, combined with promotional fees from food delivery merchants and other income, the profit margin of the food delivery business has improved significantly.

Some previous articles misinterpreted a JP Morgan global food delivery industry research report, believing that Meituan's food delivery profit margin was only 2.8%, which was a calculation error. We can see that in JP Morgan's report, the so-called "profit margin" denominator is GTV, which is the total revenue of the transaction orders. It is clear that the majority of the revenue from food delivery orders belongs to the merchants, followed by rider fees and the platform's share. Therefore, we believe that a 17.4% profit margin is a more accurate assessment of Meituan's food delivery business, aligning with JD's emphasis that "the profit margin of the food delivery business does not exceed 5%." Source: J.P. Morgan, "Global Online Takeaway (2024)" In the recently released first-quarter performance report, Meituan deliberately avoided mentioning profits, despite a year-on-year growth rate of an enviable 46.2%. We understand that Meituan is reluctant to disclose how profitable its takeaway business is—otherwise, regulators would require higher social security contributions and greater social responsibility; merchants and consumers would question and protest Meituan's charging mechanisms and profit-making abilities.

However, before JD.com entered the market, Meituan and Ele.me basically monopolized the takeaway market, and a 17.4% takeaway profit margin was Meituan's first trump card.

Although the average net profit per order is less than 1 yuan, with over 70 million orders daily, it is indeed very profitable. The super huge order volume combined with the barrier of delivery costs made it almost impossible for any competitor to shake Meituan's business before JD.com announced its entry into the fray.

2. Extraordinary Strategic Value

In addition to being very profitable, the takeaway business is a core asset that Meituan cannot afford to lose, and there is another important logic: its strategic value is immense, enough to influence the entire company's business logic.

This is Meituan's second trump card of "spare no effort," even if the takeaway business sacrifices profit margins and is not profitable, Meituan can still gain benefits from other aspects.

On one hand, takeaway can deeply bind user demand, obtaining user preference data, which can continuously provide precise traffic for in-store businesses through algorithms.

On the other hand, and more importantly, the takeaway business brings in a massive cash flow. According to the company's recently released first-quarter financial report, as of the end of March, it had cash and cash equivalents and short-term financial bonds amounting to 115 billion yuan and 65.4 billion yuan, respectively. According to the data disclosed in the company's financial report, it can contribute approximately 120 million yuan in interest income to Meituan each month. This nearly 200 billion yuan in cash reserves is the foundation for Meituan to cultivate innovative businesses while losing money, and its funding cost is far lower than market financing, providing Meituan with the confidence to continue expanding outward.

Source: Company Announcement

Operating cash flow reached 10.13 billion yuan, a significant increase from 5.98 billion yuan in the first quarter of 2024.

Through the takeaway business, Meituan is also rapidly expanding its "instant retail" business, with orders in the first quarter increasing by 50% year-on-year, maximizing the delivery capacity of its riders. The company praised in a conference call:

“Many consumer categories, including beverages, snacks, fast food, home appliances, beauty and personal care, and other novel categories, performed outstandingly. The Valentine's Day period was particularly noteworthy, with daily order volume nearly doubling year-on-year. In addition to flowers and gifts, we also found a significant increase in demand for non-food gift categories, such as small appliances, jewelry, and beauty products, indicating that our platform is playing an evolving role in catering to more consumers, especially the younger generation and a wider range of consumption categories.”

Unbeknownst to the e-commerce giants, Meituan has already extended its reach into a larger retail pie.

Additionally, through the "God Member" program of takeaway, Meituan has also acquired new incremental users for its in-store business

“In this quarter, the optimized membership program has become another powerful growth accelerator, effectively assisting the instant hotel travel business in acquiring new users, reactivating inactive users, and increasing transaction frequency.”

It is evident that high-frequency quality traffic is the core value of the takeaway business.

For Meituan, takeaway is like WeChat for Tencent; it is the foundation of most of its business and an irreplaceable cornerstone.

Therefore, whether from a static profit analysis or a dynamic user acquisition perspective, Meituan will spend money without hesitation to retain users, even if it means not making a profit for several quarters.

This is the second layer of confidence in "at all costs," as the strategic value of the takeaway business is extraordinary.

3, A Hidden Trump Card

The third card lies in Meituan's truly profitable in-store business, which is a hidden trump card that many overlook.

The reason Meituan burned money on takeaway during the group-buying war was that, although the in-store business has a very high profit margin, the frequency of user engagement is too low, resulting in a "lack of traffic." This is also a significant reason why Dianping sold itself to Meituan—while it could operate as a small and beautiful company, it seemed to lack the determination to take it to the next level.

Wang Xing connected Meituan's high-frequency takeaway business, achieving "high frequency driving low frequency," making the in-store business the core profit-generating business for Meituan, tirelessly providing nutrients to support other innovative businesses, traffic businesses, and foundational businesses.

According to the last data disclosed separately by Meituan in 2022, the profit margin of the in-store business reached an astonishing 45.6%. This is Meituan's ultimate hidden trump card that allows it to "spend at all costs"—neither Baidu nor Alibaba had the courage to burn hundreds of billions to compete with Meituan's in-store business. Alipay's "Koubei" lasted less than a year before it failed, resulting in a loss of one leg in the cycle of takeaway and in-store business, causing Ele.me's market share to decline.

Will this new war be different from the past?

In my personal opinion, it ultimately depends on Liu Qiangdong's demand for and view on "high-frequency traffic." For Douyin, it is already one of the strongest daily active apps in China, and what it needs more is high-margin in-store business; continuing to burn money in the challenging takeaway business is not very meaningful. However, for JD.com, it has witnessed how competitors have relied on wild traffic to drive internal high-frequency business, so JD's determination and investment in the takeaway business should not be underestimated.

Conclusion

The challenge facing Wang Xing is not merely a subtraction problem of takeaway orders and delivery riders, but it could potentially become a division problem. Once there are signs of market share loosening, Meituan will face challenges of weakened bargaining power from merchants and riders on the supply side, leading to negative feedback on profit margins. Therefore, using a strong statement of "at all costs" as a strategic intimidation against competitors is undoubtedly a tactical wisdom akin to a nuclear weapon.

Meituan is currently facing a situation where, on one hand, there is direct competition from JD.com’s takeaway and Taobao's flash purchase, and on the other hand, there is erosion from Douyin on the in-store business, along with regulatory demands to control and reduce unreasonable charges on platform merchants, and the rapid increase in bargaining power from merchants and riders below, making scale advantages a burden The loosening of market share always first affects the industry leader.

Can Meituan win another share battle? Time will give us the answer