Difficult to exit! What does the long-term "takeout war" mean?

Subsidies lead to users' "price dependence," are takeaway platforms heading towards a long-term low-profit era?

On July 18, the State Administration for Market Regulation held talks with three platform companies: Ele.me, Meituan, and JD.com, requiring them to correct aggressive promotional behaviors, promote rational competition, protect the interests of consumers, merchants, and delivery riders, and support the sustainable development of the catering service industry. It is noteworthy that this regulatory statement differs from a previous talk in May this year, shifting the focus from "healthy growth of the platform economy" to "healthy and sustainable development of the catering service industry."

UBS pointed out that excessive takeaway subsidies have led to four negative effects—weakened foot traffic for offline restaurants, overall industry profit compression, unbearable burdens on small and medium-sized restaurants, and increased waste. It fosters users' "price dependence" mentality, exacerbating the risk of industry deflation. Therefore, regulatory authorities chose this moment to intervene to prevent these issues from worsening further.

Despite the pressure on takeaway business profitability, considering that major platforms have invested over 20-30 billion yuan, UBS expects that the giants will not easily withdraw but will shift to a strategy that emphasizes return on investment, such as changing the form of subsidies from "free meals" to "discount coupons," becoming more rational. If capital investment stabilizes, profitability pressure may slightly ease in the second half of 2025.

In terms of stock prices, UBS is optimistic about Meituan in the short term and Alibaba in the long term. Meituan has seen a significant decline and has stronger elasticity, providing room for a rebound. In the medium term, they are optimistic about Alibaba's valuation potential in AI and other multi-line businesses.

Reasons for Regulatory Intervention: Excessive Subsidies Bring Multiple Negative Effects

UBS believes that the reason for regulatory authorities to intervene at this time is that the large subsidies from takeaway platforms, while artificially boosting demand and delivery volume, have also produced four unexpected consequences.

First, subsidies stimulated takeaway demand, indirectly weakening foot traffic for offline restaurants, impacting the dine-in market.

Second, the average price of takeaway orders is relatively low, and restaurants still have to bear part of the subsidy costs, further compressing overall industry profits, especially for small and medium-sized restaurants with limited capacity.

Furthermore, the surge in orders can lead to excessive packaging and significant waste.

In the longer term, continuous subsidies reinforce consumers' psychological expectation that "low prices are reasonable," which may lead the entire industry into a price war and price deflation dilemma.

Therefore, UBS believes that the regulatory authorities' intervention this time is to prevent these issues from worsening further and to ensure that the industry can develop in a healthier and more sustainable direction.

Short-term Impact: Investment Focus Shifts to ROI Orientation

UBS believes that this regulatory talk will help improve short-term market sentiment. In fact, after the announcement, the ADRs of Meituan, JD.com, and Alibaba rose by 3% to 5% in after-hours trading.

However, the reason why major e-commerce giants entered the takeaway market is that the initial purpose was not to make money from takeaway but to attract users and achieve cross-selling, thereby driving the development of their core e-commerce business and maintaining their market share. Especially in the context of Meituan's rapid expansion in the instant retail sector, it has penetrated more e-commerce categories, such as 3C electronics and fast-moving consumer goods, posing a direct threat to traditional e-commerce platforms As of now, the industry as a whole has invested approximately 20 billion to 30 billion yuan in the takeaway competition, therefore they are unlikely to easily give up and destroy their previous investments.

UBS expects that platforms will adopt a more ROI-focused and more restrained promotional strategy moving forward. For example, subsidies may shift from "direct discounts" to "threshold reduction coupons" and other forms with higher barriers. The categories of subsidies may expand from milk tea to light meals, snacks, etc., reducing the impact on the main meal industry.

Overall, if platforms become more rational in their capital investments, the impact on profitability in the second half of 2025 may not be as pessimistic as before.

Long-term Structural Changes, Accelerated Concentration in the Catering Industry

From a longer-term perspective, even if future competition will be more regulated, UBS still expects the industry may undergo the following structural changes.

1. Accelerated Concentration in the Catering Industry

Experts point out that platform subsidies often favor chain brands because they have the capacity to absorb a significant increase in order volume and collaborate with platforms for promotions. This bias will lead to chain stores continuously expanding their market share, while small and medium-sized catering businesses gradually become marginalized.

Many small and medium-sized businesses have to accept higher platform commission rates to gain traffic; whereas chain brands, due to their strong bargaining power, have lower commission rates. As platforms increasingly favor cooperative brand merchants, the overall industry commission rate may decline.

2. Increased Price Sensitivity Among Consumers

Instant retail users previously valued delivery speed more and were less sensitive to price, allowing platforms to maintain a high average selling price (ASP) and profit margin. However, with Alibaba and JD.com entering the market aggressively, users have more platform choices and price comparisons are more intense, which will compress the platform's average selling price and profit margin, impacting Meituan's original 60%-70% market share.

3. Platforms Willing to Accept Lower Profits

The giants value takeaway not only as a business in itself, but as a tool for traffic generation and enhancing user stickiness. Therefore, they may maintain a low-profit operating state for a long time, viewing it as a form of marketing investment.

4. Rising Fulfillment Costs, Industry Entering Over-Service State

To meet users' expectations for rapid delivery, platforms are increasingly investing heavily in logistics infrastructure, leading to a phenomenon where users are "spoiled," but in reality, not all products need to be delivered within an hour.

For example, on July 17, Meituan announced that it would promote a subsidy policy nationwide for paying pension insurance for full-time and long-term part-time riders, expected to be completed by the end of the year. This welfare investment will further increase fulfillment costs.

Short-term Focus on Meituan, Mid-term Focus on Alibaba

UBS believes that the cooling of competition among takeaway platforms will help drive stock price rebounds.

From a short-term stock price opportunity perspective, Meituan is superior to JD.com, and JD.com is superior to Alibaba. Because Meituan has seen a significant decline this year and has been most affected, the easing brought by regulation is most likely to allow it to rebound first. JD.com's valuation is at a relatively low level, and its performance is very sensitive to profit changes. Due to this year's takeaway investment expectations dragging down about 50% of profits, if competition eases, its stock price elasticity will also be strong. Alibaba is not expected to benefit as significantly as the first two in the short term From a mid-term potential perspective, Alibaba is superior to Meituan and JD.com. If the industry continues to operate at low profits, the overall valuation of the takeaway business may be downgraded. Meituan's valuation center may face downgrade risks. On the JD.com side, the market will closely monitor its investment efforts in the takeaway business. Recently, JD.com's management has been relatively restrained, for example, not participating in the "0 yuan beverage" subsidy war over the past few weekends. At this time, companies with diversified business lines that can tell AI stories (such as Alibaba) are more likely to attract funding.