Meituan Initiates Strategic Counter-Move

Over the past couple of years, major players in the local living sector like Alibaba and Pinduoduo have been ramping up their business efforts, while emerging forces such as Douyin and Kuaishou are rapidly expanding their foothold, capitalizing on their traffic advantages to carve out a share of the takeaway and dine-in markets. In response to this competitive landscape, Meituan has launched a tactical "defensive counteroffensive" aimed at reorganizing its internal structure to integrate its "core local business" while fostering greater synergy within the company. Moreover, Meituan has made strides into lower-tier markets, effectively bringing the fight to its rivals' territories.

Meituan's offensive appears to be yielding positive results, as evidenced by its latest quarterly report. The company achieved revenues reaching 93.577 billion yuan, marking a robust year-on-year growth of 22.4%. Its net profit soared to 13.7 billion yuan, reflecting a staggering 307.5% increase, exceeding market expectations. This notable surge in profitability can be attributed not only to the performative strengths of its takeaway and dine-in businesses but also to significant reductions in losses from new ventures and a remarkable surge in instant delivery services. Meituan’s instant grocery delivery segment saw daily orders exceed 10 million, with both user growth and transaction frequency experiencing double-digit year-on-year increases.

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Earlier this year, Meituan's stock price fell below its issue price, prompting CEO Wang Xing to comment in last year's third-quarter earnings call that its current valuation primarily reflects its takeaway business. However, since the beginning of the year, Meituan's shares have staged a remarkable recovery, suggesting that the capital markets may be beginning to recognize a "new value" in the company. Investors are keen to discover what the next chapter in Meituan’s “new story” will entail, beyond just takeaway and dine-in.

Emerging Opportunities Amid Strategic Changes

As we moved into 2024, Meituan's revenue and profit metrics have been noteworthy. The company’s third-quarter revenue of 93.577 billion yuan positions it just behind giants like Alibaba, Tencent, and Pinduoduo, nudging closer to the 100 billion yuan mark. On the profitability front, Meituan has successfully recorded over 100% growth in operational profit for two consecutive quarters.

The core local business unit, which includes restaurant takeout, dine-in services, instant delivery, and travel accommodations, generated an impressive revenue of 69.37 billion yuan, demonstrating a year-on-year growth of 20.2%. Notably, the volume of instant delivery orders reached 7.1 billion, reflecting a 14.5% increase, while revenue from this segment grew by 20.9% to 27.8 billion yuan. This discrepancy indicates that each delivery is yielding higher revenue, contributing to incremental profit gains for Meituan.

Additionally, the performance of Meituan's in-store travel business also showed promise, with order volumes growing by over 50% year-on-year and the annual active merchant count achieving new heights. In simpler terms, Meituan’s core operations related to takeaway and dining are now more profitable, establishing a stable base that positions the company for sustained positive growth. During the Q3 earnings call, CFO Chen Shaohui remarked on the healthiness of Meituan’s current growth trajectory and strategic direction, emphasizing a gradual enhancement of profitability.

This success is a testament to Meituan's effective defense strategy, which has combined internal reorganization with a focus on cooperation among its core businesses. The company has undergone several organizational adjustments throughout the year, including consolidating its platform and core business groups into a dedicated "core local business" sector, making this the first time in its history that it has appointed a single CEO to oversee such a substantial swath of its operations.

These organizational shifts illustrate Meituan's dedication to streamlining operations and maximizing the synergistic potential between its primary services—takeout and dine-in. Additionally, the company has recalibrated its operational targets to prioritize order growth above gross merchandise volume (GMV) in its takeaway business. Enhanced efforts to engage in price competition have included the launch of new offerings like "Pinduoduo Meal Deals," as well as significant upgrades to membership benefits aimed at attracting more traffic through competitive pricing strategies, further penetrating lower-tier markets.

Consequently, Meituan has managed not only to protect its market share within the takeaway sector but also to bolster its brand loyalty. The details in the Q3 report highlight this sentiment, shedding light on improved operational efficiency in the core local business and meaningful reductions in losses across new ventures such as Meituan Select, XiaoXiang Supermarket, and B2B dining services. By the third quarter, losses associated with these new business avenues had decreased by almost 80% compared to the previous year.

Among these new business models, XiaoXiang and Select showed significant growth. Apart from Meituan’s Select, other business categories collectively turned profitable in the third quarter. As revenue from instant grocery services like XiaoXiang and instant delivery continues to rise, Meituan’s foray into instant retail is also gaining traction. CEO Wang Puzhong noted a remarkable 54% year-on-year growth in instant retail orders from January to August 2024, particularly within lower-tier cities and market segments.

Competitive Landscape in Instant Retail

Long before the recent surge, Meituan made strides into the instant retail arena, launching its instant delivery services back in 2018 and expanding further with "Meituan Grocery" in 2019. Despite its established dominance in the takeaway segment, the operational challenge of high labor costs coupled with low average order values necessitated Meituan's transition into instant retail—a strategic move to leverage existing user traffic for maximum value extraction.

However, Meituan isn't the only player in this burgeoning space. Competitors such as JD.com, Alibaba, and Douyin are each intensifying their focus on instant retail. JD.com has introduced a “Fast Delivery Section” on its app to penetrate the takeaway market, encompassing various categories including fresh produce and general retail, with over 100 well-known brands already setting up stores in its instant delivery sector. On the other hand, Alibaba's Ele.me has unveiled its latest strategic initiative, partnering with near-field brands to create flagship stores on their instant e-commerce platform, operated either independently by brand merchants or in close collaboration with the platform itself.

Similarly, Meituan is doubling down on instant retail, having revamped its grocery service into XiaoXiang Supermarket, expanding to encompass a full range of products. In October, Meituan unveiled “Star Plan” for its instant warehouses, indicating its goal to exceed 100,000 such facilities by 2027.

Interestingly, while instant retail isn't a completely new concept in the realm of local services, exemplified by the fierce competition among fresh e-commerce platforms like Daily Fresh, Dingdong Maicai, and Hema, it has undergone a resurgence in interest within just two years, driven largely by shifts in consumer behavior and market demand. Today's younger consumers prioritize speed and instant availability in their shopping experiences, with over 50% seeking same-day delivery. This adaptability reflects a dramatic cultural shift that has bolstered the case for immediate retail services.

Moreover, with traditional e-commerce platforms grappling with price wars, many are on the lookout for “new stories” to attract consumers. For Meituan, its established infrastructure in takeaway and in-store services remains a resilient stronghold, but fresh avenues for growth are imperative as competition intensifies across the market landscape.

Factors contributing to the resurgence of instant retail include evolving consumer preferences, increasing demand, and advancements in operational models. Before now, the high perishability of fresh goods and elevated fulfillment costs hindered the success of instant models; however, the evolution of front warehouse strategies has yielded new opportunities. The industry now boasts a sophisticated version of this model, expanding product offerings to better align with consumers' purchasing habits.

Now, innovative strategies such as warehouse-retail integration or collaborative warehouse models have emerged, further enhancing operational efficiency in the instant retail sector and alleviating previous challenges tied to high overhead and unsustainable growth strategies. For instance, Meituan's partnership with Miniso has led to the development of “24-Hour Super Stores,” which have already introduced over 1,800 SKUs since commencing operations in July.

As CEO Wang Puzhong remarks, Meituan’s entry into the instant retail supply chain cultivates significant opportunities for growth. Presently, the opportunities within instant retail continue to evolve in terms of category diversification and user engagement, laying the groundwork for a comprehensive ecosystem. As said earlier, this network of instant delivery remains pivotal in the successful execution of services.

Delivering Quick Service through Takeaway Infrastructure

According to projections from Morgan Stanley, China's instant retail market could soar to 2 trillion yuan by 2030, growing at a remarkable compounded annual growth rate of 20%. Meituan appears well-positioned in this expanding market, with reports indicating that daily orders for instant delivery services have reached approximately 9 million, with an average ticket price hovering around 80 yuan. Based on these figures, the annual transaction volume could be projected at around 250 billion yuan, with overall order growth consistently surpassing market expectations.

Within this evolving framework, Meituan is essentially conceptualizing takeaway as a courier service. Despite the ongoing struggles with profitability in its takeaway operations, the high retention and frequency of customer interactions facilitate substantial traffic generation beneficial for other branches of its business. By engaging active takeaway users, Meituan aims to drive lower-frequency traffic to dining and travel services, cultivating a consumer mindset that has proven difficult for competitors like Douyin to replicate at similar customer acquisition costs.

In essence, the robust network of delivery personnel and sophisticated algorithms associated with instant delivery might be regarded as the "new infrastructure" for the digital age. It draws parallels to WeChat’s role in Tencent’s ecosystem—serving as an entry point to monetize a myriad of associated services and resources through its vast user base.

In a similar vein, Meituan's approach involves leveraging high user engagement in takeaway to generate synergies that enhance services across the board, establishing a “flywheel” effect for related businesses. As the ecosystem’s flow strengthens, we witness the positive momentum reflected in Meituan's latest quarterly achievements.

While Meituan boasts a unique advantage in the instant retail landscape, competitors are simultaneously striving to carve out their distinct market positions. Recently, JD’s Qixian has energized the competitive landscape with aggressive pricing strategies, leveraging capabilities in supply chain integration through digital solutions, local supply chain management, and instant delivery to enhance efficiency across all operational segments.

In contrast, Alibaba has restructured its operational matrix to better align with market demands. Following the revival of front warehouse strategies by Hema, the food retail platform has focused exclusively on fresh produce. In a broader strategy, its Taobao Hourly Delivery services have been upgraded to strengthen its core traffic channels, aiming to integrate with Ele.me while enhancing service offerings and supply capabilities.

Meanwhile, Douyin's "Hourly Delivery" initiative is gaining popularity, mirroring the approaches of JD and Taobao by bolstering supply chains alongside inviting offline merchants to join its ranks. However, the key point of differentiation for Douyin lies in its unprecedented traffic potential.

Nonetheless, Morgan Stanley anticipates that Meituan is best positioned to seize opportunities in instant retail, projecting it could capture as much as 50% of the market by 2030. As Meituan envisages, long-term forecasts suggest instant retail could monopolize over 10% of the total e-commerce market, equating to a market value close to 1.3 trillion yuan, indicating a potentially tremendous incremental growth opportunity for the company.

To maintain its competitive edge, it begs the question: How can Meituan further evolve its strategies within the instant retail domain? The answer may lie in enhanced organizational efficiency and flatter management structures that facilitate rapid adaptation to market dynamics.

As illustrated by the recent changes initiated by CEO Wang Xing, the flattening of the organizational hierarchy aims to optimize management processes. The integration of various business teams under the "core local business" segment facilitates improved identification of consumer needs while augmenting the value proposition for merchants, thereby enabling the company to strengthen its pricing capabilities and market presence.

In tandem with improvement in the retail sector, the deployment of technology and digital solutions continues to empower Meituan's growth trajectories. Recent investments in artificial intelligence, including AI-driven assistants for both B2B and B2C sectors, are set to enhance operational quality and streamlined services. Furthermore, strategic partnerships—like those with Miniso and Kuaishou—are crucial for expanding product offerings, front warehouse systems, and market reach.

Traditionally, Meituan has taken a methodical approach to growth, realizing that the cornerstone of its commercial model hinges on the cooperative relationships established among businesses, users, and delivery personnel. By fostering a stable ecosystem, Meituan can ensure mutual benefits across stakeholders.

In light of the shifting landscape, Meituan is tasked with not only preserving its fortifications against competition but also innovating to expand its ecosystem. Having transitioned through a phase of heavy subsidies and competitive burn-out, it stands at the forefront of an evolving distribution of traffic both online and offline as synergies among its core local businesses intensify. History has proven cyclical; the only constant is change. Nevertheless, Meituan possesses the resilience and strategies to navigate these ongoing transformations with confidence.