Has the moat of food delivery disappeared?

Meituan's second-quarter performance was poor, and its stock price plummeted in response, leading to ongoing discussions about whether "the delivery moat has disappeared." Some even ask:

"Does delivery really have a moat?"

Before discussing delivery, we can recall an event.

When Didi went public in 2021, it angered regulators, and its app was taken down for nearly two years. However, during that time, Didi's market share remained stable at around 70%—it dropped from 90% but stabilized afterward. This tells us a fact: the ride-hailing business indeed has a moat.

Today, the delivery market has experienced disruptions from JD and aggressive attacks from Alibaba. After one quarter, JD invested about 14.5 billion, Alibaba invested an additional 15 billion, and Meituan also invested about 9 billion. The operating profit of the core local business dropped from 15.23 billion in last year's Q2 to 3.72 billion this quarter.

At first glance, the delivery moat seems fragile, and one could argue that it "does not exist."

However, upon deeper investigation, the conclusion may be the opposite.

As we know, delivery can be divided into two categories: food delivery and beverage delivery. The former meets the demand for main meals (including some late-night snacks), while the latter meets the demand for drinks. From the supply side, these two business types do not overlap at all, and their cost structures differ significantly. Beverage delivery has a higher gross margin, greater production efficiency, and more production flexibility. From the demand side, the demand for main meals is relatively stable, concentrated in time, with significant peak and trough effects, while beverage demand is more elastic, with smoother time and peak-trough effects.

The differences in supply and demand between food and beverage delivery determine that the true delivery moat is actually in food delivery, while beverage delivery is a relatively easier market to enter.

Another decisive factor is that the time sensitivity of food delivery is much higher than that of beverage delivery.

Generally speaking, consumers of food delivery are unwilling to wait; the more timely, the better. In contrast, consumers of beverage delivery can tolerate differences in experience for a few yuan in discounts.

This time sensitivity, combined with the concentrated timing of main meals and limited production flexibility for merchants, makes consumers more cautious when choosing food delivery, placing more emphasis on experience rather than price.

This is why, despite the fierce competition, JD and Taobao's food delivery orders quickly caught up, but in the main meal delivery market, Meituan still holds about 70% of the GTV market share.

This result is driven by two factors: first, the average order value for JD and Taobao's food delivery is still lower than Meituan's; second, Meituan is still focusing its subsidies most tightly on food delivery.

In other words, among delivery subsidies, Meituan invests the most in food delivery subsidies, where the three companies are essentially in a standoff, not giving an inch. Although Meituan's order volume is still lower than 70%, its average order value is higher, so its share at the GTV level remains stable Meituan's food delivery subsidies are mainly divided into three levels: one is Meituan's large-value coupons for members, focusing on retaining core users; the second is "Pin Hao Fan," targeting price-sensitive users; and the third is "Shen Qiang Shou," capturing high-value users who still pay attention to cost-effectiveness.

Of course, there are also subsidies for tea delivery, but it is not the core defensive position.

On one hand, this position is indeed difficult to defend, as previously explained; on the other hand, the ROI from defending it is too low.

However, that said, the moat of the food delivery business is indeed not as strong as that of ride-hailing, which I have always mentioned in the past, as the stability of ride-hailing is inherently higher than that of food delivery.

However, we also need to view the intensity of competition in the food delivery and ride-hailing sectors objectively. The kind of cost-agnostic investment made by the top giants in the food delivery sector did not occur in the ride-hailing market back then. Of course, whether they themselves realized that the moat of ride-hailing was too deep and thus were unwilling to compete is a "chicken or egg" question.

Will the moat of food delivery be breached?

In the previous paragraph, we only addressed the question of "whether food delivery has a moat," and the answer is clearly yes, but it is not as deep as that of ride-hailing, let alone social networks. This is my viewpoint. If you agree, we can continue to discuss whether the moat of food delivery could potentially be breached.

Here we need to assume some premises, namely that there has been no fundamental technological change, or that no competitor has emerged with technology that leads ahead of Meituan.

In this case, it requires competitors to never make mistakes and to keep investing until both sides reach an absolute balance in supply, fulfillment, and consumer perception, and only then can the user experience (UE) be leveled out.

It must be said that this will be a long and protracted battle.

First, on the supply side, Meituan's food delivery has actually been evolving. In addition to leading in the number of merchants—which is relatively easy to catch up with—it has also accumulated the most historical data and developed ratings based on data advantages, such as the must-order list. Furthermore, it has strengthened price-sensitive supply, giving rise to the rapidly growing product "Pin Hao Fan," and has launched satellite stores targeting brand merchants, which have developed rapidly and expanded to thousands of stores. There is also "Raccoon Canteen," a central kitchen solution for food safety issues, further extending its business upstream in the supply chain. Overall, the pace of optimization on the supply side is continuously accelerating.

Next, on the demand side, one particularly good aspect of Meituan's membership program is its substantial subsidies for old and high-tier members, which creates a positive cycle. This establishes a more lasting trust between the platform and core users, continuously increasing the overall user frequency and the proportion of core users. This is actually a kind of flywheel effect, which can also be evidenced by the data shared after the management's performance meeting, as we can see from the increasing benefits of Black Diamond and Black Gold members in the second quarter.

Finally, on the fulfillment side, the significant profit drop in the second quarter was largely due to a substantial increase in rider subsidies. On one hand, this was due to increased protective expenditures, and on the other hand, it was because competition increased the subsidies. This resource is mainly related to order volume scale. As long as Meituan can maintain its scale advantage, its fulfillment costs can at least remain no higher than the industry average. Its algorithms still have some advantages, and overall, the probability of purely falling short on the fulfillment side is extremely low In fact, the advantages of the three platforms together have contributed to Meituan's leading average user experience (UE), and this leading average UE has given Meituan the confidence to continue subsidizing.

Overall, I tend to believe that even in a protracted battle, Meituan can remain undefeated; the worst-case scenario would be entering a tug-of-war, but its losses would be lower.

Of course, if this situation occurs, the stock price will look very bad.

So, is it possible for this situation to happen?

There is a possibility.

If the takeout business and e-commerce have good synergy, for example, if 100 million new users are added, and these 100 million new users originally came for milk tea, then ordered a main meal on the side, and later started buying clothes, shoes, cosmetics, mobile phones, and computers.

Even if the takeout business burns 500 yuan in costs for this new user, it can easily earn it back through e-commerce.

Because the annual average consumption per user in Taobao's e-commerce is about 10,000 yuan, with a monetization rate of about 4% on the platform, it can break even in 15 months. Considering the entire user lifecycle operation, this is a very worthwhile investment.

However, once this situation occurs, a new situation will inevitably arise.

Since it is so easy for takeout to convert to e-commerce and break even, Pinduoduo, Douyin, JD.com, and Kuaishou will definitely not sit idly by, as e-commerce is their core business, and it will ultimately lead to a new red ocean competition.

But I tend to believe that the likelihood of this outcome is not high.

It's not that no users will become loyal e-commerce users because they were attracted by milk tea, but rather that this proportion will not be very high.

If it were really high, JD.com would increase its investment, and Pinduoduo and Douyin would have long since acted upon the news.

Logically speaking, consumers will still consider comprehensive factors such as price, tone, demand, supply, and service when shopping.

Setting aside these factors, Taobao Flash Sale itself will increase user activity, promote the integration of instant retail and e-commerce, and enhance Taobao's position as a comprehensive consumption platform for e-commerce, local life, takeout, and instant retail.

After all, Taobao is still the undisputed No. 1 in most e-commerce categories and is also a top platform for merchants. If it can organically combine long-distance and short-distance retail, it can indeed enhance its competitiveness.

For example, in traditional core categories such as clothing, shoes, cosmetics, and daily necessities, Taobao Flash Sale still has advantages in the supply chain. It only needs to make some differentiated modifications to the supply, and moving it to Taobao can significantly enhance the user experience. For categories like 3C digital products, home appliances, and fresh produce, Taobao itself has the foundation of Tmall Supermarket and Hema. If it fully transitions from long-distance to short-distance, it may also reverse the situation in these categories that it has struggled to penetrate during the long-distance era, enhancing Taobao's competitiveness.

From this perspective, it does not have to engage in a life-and-death struggle with Meituan; it only needs to achieve the mindset of "making Taobao a comprehensive consumption platform that combines long-distance and short-distance."

In this case, Meituan will certainly lose some market share, but the overall market will grow significantly, and Taobao will not invest indefinitely. Meituan's profit margins will eventually return to normal, and both sides will get what they want while giving up some benefits I still believe this situation is the most likely outcome.

After discussing the moat, let's talk about the current progress of Meituan's various businesses.

In the second quarter, the daily average order volume for food delivery and flash purchase reached around 75 million, and it is expected to reach about 88 million in the third quarter, with the daily average order volume for food delivery estimated at around 74.5 million and for flash purchase at about 13.5 million.

Focusing on flash purchase, this business grew rapidly in the second quarter, especially in high-value categories. Due to increased subsidies and enhanced service guarantees, categories like 3C, digital products, and home appliances experienced explosive growth, with the annual GTV expected to exceed 380 billion, and it is expected to approach 500 billion by 2026.

In the past few quarters, flash purchase has achieved scaled profitability, but this quarter, due to increased investment, it returned to a loss, and the loss is expected to widen in the third quarter, mainly due to increased subsidies to cope with competition, but this is incremental.

By the way, Meituan is very cautious about subsidy competition in the food delivery business, mainly because food delivery is generally more about existing stock. As a leader, participating in subsidies is not very cost-effective, as no matter how much you subsidize, it is unlikely to further increase market share. It is just a last resort, to put it bluntly, it is relatively passive, so it is normal for the stock price trend to look poor.

The performance of in-store hotel and travel is relatively normal, with a GTV of about 280 billion in the second quarter, a monetization rate dropping to around 6%, estimated revenue of about 16.8 billion, and a profit margin estimated at 29%, with operating profit around 4.87 billion.

The GTV for the third quarter is expected to be around 338 billion, with the monetization rate expected to stabilize at around 6%, and an operating profit margin of about 28%.

This quarter, the overall operating profit of the core local business is 3.72 billion, which means that food delivery and flash purchase together lost a little over 1 billion, as there are some profits from air tickets and homestays.

Flash purchase is said to have lost about 500 million, while the loss scale for food delivery may be between 800 million to 1 billion. It was normally profitable in April, broke even in May, started losing in June, lost more in July, and slightly improved in August. It can be roughly estimated that the losses for food delivery + flash purchase in the third quarter may be between 6 billion to 8 billion, and the profits from in-store hotel and travel will definitely not fill the gap of losses from food delivery and flash purchase.

Among the new businesses, Xiao Xiang and Keeta are performing very well. Xiao Xiang should already be the number one in the front warehouse field, both in scale and growth rate, and it may accelerate growth in the second half of the year, as Xiao Xiang's online business is still expanding into new cities and densifying existing networks. Happy Monkey has officially opened, and Xiao Xiang is indeed a business that hits user demand very well, with advantages in supply, pricing, fulfillment, and service For the core customer group, it has become a choice that can be bought with closed eyes, significantly reducing the decision-making cost for users.

Keeta is progressing rapidly, and some clues can be seen from the changes in commission income from new businesses.

As of the latest month, Keeta has approached a 60% market share in Hong Kong and is likely to achieve profitability next year; in Saudi Arabia, its market share has reached the second in the industry. Although the order volume in these two markets is not large, the average transaction value is very high, reaching 4-6 times that of the mainland, so it is still worth looking forward to based on GTV. If it can also penetrate other countries in the Middle East and South America, then Keeta can be valued based on GTV.

If there is no higher-dimensional force intervening, the competition in the takeaway market will continue, and Meituan investors will likely have to endure for a while longer.

However, the peak season in the third quarter is basically over, and with schools reopening in September, the order volume will naturally decline, and the value of subsidies will be greatly discounted. It is expected that Taobao's subsidy offensive will slightly weaken.

The core issue is still one point: as long as Meituan can maintain its market share in the food delivery sector, there shouldn't be a big problem.

Author of this article: Zuo Ma de Han Zi, Source: Zuo Ma Finance, Original title: "Has the Moat of Takeaway Disappeared?"

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