Alibaba & Meituan: Face Off?
Meituan, who is often nicknamed by investors as the "Amazon for local services" in China, is the indisputable leader in the food delivery services market. In 2019, food delivery generated revenue of RMB 55 billion for the firm, contributing 56% of the total revenue. Alibaba runs the second-largest food delivery services in China, Ele.me, to directly compete with Meituan. On the surface, Ele.me is hardly a significant part of Alibaba's business empire, only accounting for less than 5% of the total revenue. Nonetheless, both benefited from the "shelter-in-place" due to COVID-19, as they were the only national brands that could provide delivery services during the self-quarantine period in China.
It's no secretes that Alibaba has been fighting fiercely against Meituan on its home turf. Why? The food delivery network infrastructure is a strategic asset, to say the least. You can deliver meals today, you probably can deliver products sold on eCommerce platforms tomorrow. That strikes a raw nerve with Alibaba. The collaboration with Huawei also sent a clear signal: Meituan's ambition does not stop at local services. Think about payments, advertising, and other transactions potentially involved: the stakes are too high for Alibaba to go down without a fight.
Meituan gaining an upper hand in the game
It's probably not exaggerating to say Meituan has so far played very well. It has been consistently gaining more market shares from Ele.me by leveraging its bigger and more efficient delivery network, which in turn allows Meituan sustainable pricing power. Take the latest quarter, hit by COVID-19, Meituan's total food delivery volume declined 17% in Q1' 20. However, as more branded restaurants were accelerating digital transformation and moving online, the average value per order increased 14% YoY. Meituan's food delivery services demonstrated excellent unit economics: the food delivery revenue per order consistently outgrew the rider's cost. Total delivery cost as % of revenue dropped from 86% in Q1' 18 to 74% in the latest quarter, which was driving steady gross margin expansion.
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Meituan thrusting into credit services
As the competition is intensifying, they take the fight to a whole new level. In January 2020, Alibaba regrouped its local services business by appointing Ant Financials' CEO Simon Hu as the Chairman of the local services to orchestrate a cross-platform strategy to fence off Meituan. Well, Meituan was certainly not sitting idle: Meituan rolled out its version of credit service, “Monthly Pay,” a direct challenge to Ant Financials’ “Huabei.”
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Meituan began testing this credit payment feature ("Monthly Pay") in September 2019 and formally launched it on May 29th, 2020, which is offered through its micro-credit subsidiary Meituan Sankuai Micro-credit and its financial institution partners. Meituan "Monthly Pay" is competing with similar services provided by Alipay "Huabei" (launched in 2015, mentioned earlier), Tencent WeChat "Fenfu" (launched in 2019), and JD "Baitiao" (launched in 2014).
Credit service is a lucrative business for Ant Financials. While Ant Financials is not a public company and does not disclose its financials, Alibaba recorded a $721 million profit from its 33% stake in Ant Financials, implying a $2.18 billion profit from Ant Financials in Q4'19, of which we estimate that credit services accounted for a large portion.
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However, Meituan moving into credit payment products does not come without risks. Tencent holds a 20% stake in the company and Meituan already competes with Tencent on payment and mini-programs. Will the competition eventually lead to a break-up? We think the odds are low as Tencent is prioritizing cloud computing at the moment. But things can change quickly in the fast-moving landscape of China tech.
Alibaba pulling the lever to fight back
What can Alibaba do? Directing more traffic to local services is a convenient start. Our team conducted a channel check with Alibaba in May and learned that the company has been aggressively persuading offline retailers to open online stores on Tmall, rather than just offering delivery services through Ele.me and Alipay. Companies in talks include many major offline chains, such as Heytea, Nayuki, Mcdonald's, and KFC. Once the offline chains open stores on the platform, Tmall would provide large subsidies to lure online customers to buy bundled offline products, such as 10 Starbucks coffees or KFC meals at steep discounts. Customers may also use rewards across different brands.
In fact, during the 6.18 shopping festival, Alibaba is heavily promoting its "local services" across Tmall and Taobao platforms in certain verticals. For example, our recent channel check with one offline brand in the aesthetic medicine services shows that it already generated 2.5 million RMB sales in the first three days since June 1st, compared with 1.7 million RMB sales from the entire two weeks of 12.12 promotion in 2019.
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We are very eager to see if Alibaba's directing more traffic from eCommerce platforms (Tmall & Taobao) could help Ele.me to stand its ground. Time will tell.
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