The Other Chinese Superapp
Author’s note: If you want to watch the video first it’s below
Since I wrote this, Taiwan has gone into a COVID-lockdown and I have been able to observe for the first time just how important food delivery is to an Asian urban environment. I get a sense of just how massive a business the Meituan food delivery juggernaut must be.
Thus, it is natural that the Chinese government is going to throw some shade their way. The administration fined them 3% of their revenue, $533 million USD worth, for monopolistic practices in the food take-out market.
According to investigations, since 2018, Meituan has abused its dominant position in the service market of online catering take-out platforms in China by implementing differential rates and delaying merchants’ launch, prompting merchants on the platform to sign exclusive cooperation agreements with them, and exclusive cooperation through the collection of security deposits, data, algorithms and other technical means
The interesting behavior is the “exclusive cooperation deposit”, which feels like some sort of ransom that Meituan collects from the food merchant to guarantee that they will not work with any other food platform. I wonder how Meituan was ever able to get away with that. Never heard of anything like that before.
And of course, there is also the mention of algorithms again.
Obviously, Meituan has to behave for a while to stay on the government’s good side. Just wonder how long.
Check out the Asianometry audio podcast. It’s not really a podcast. But if you feel like you don’t need the visuals and just want to listen to me talk, then here you go:
The Chinese government has spent a lot of effort reining in the power of large tech companies like Alibaba. And deservedly so. So it is natural that Meituan should receive scrutiny as well.
Meituan, which used to be called Meituan Dianping before a September 2020 name change, has risen to become China's third largest tech company. Starting off as a Groupon clone, Meituan has parlayed its success into a super-app on par with Tencent's WeChat.
Founder and CEO Wang Xing seeks to make Meituan the king of China's "online to offline" space. He is now taking the company on a new journey, challenging big incumbents in the massive community buying space, and burning plenty of cash in doing so.
In this video we are going to look at one of China’s newest and most ruthless tech giants.
In 2010 Wang Xing, a serial entrepreneur with experience in the United States, started a website called Meituan. He had been inspired by Groupon and Meituan was a China based copy.
Meituan joined a morass of nearly 5,000 Groupon copycats in the Chinese internet space. If Meituan did not differentiate itself then they would drown in a sea of competitors.
I do not know if you remember those days back in the United States, but Groupon's surge and growth foreshadowed Uber's years later. The industry burned immense amounts of venture capital. You had to hire thousands of salespeople to knock on small businesses' doors and convince them to sign up.
Faced with so much competition from companies like Lashou.com indiscriminately buying their way into the lead, Wang decided to reject such unsustainable spending and focused on efficiency and profitability.
This focus paid off the next year when the market shook out and funding tightened up. Fortunately, Meituan had enough cash in the bank to survive.
By then, Wang had established his business playbook: A focus on efficiency and cost-leadership through the use of technology. Ruthless horizontal expansion. And a zen comfort with competition.
From Survival to Expansion
Meituan began its move towards something bigger with the 2012 launch of Maoyan Dianying, an online movie ticketing site. This came just two years after the company's founding.
Movie tickets made a lot of sense for Meituan's first expansion. Movie times can be indexed and updated. People like to buy tickets ahead of time so to reserve the best seats. And lots of people like to see movies.
Meituan followed up Maoyan with a flurry of product launches. A year later in 2013, Meituan stepped into the hotel booking space.
They also entered food delivery - soon to be one of their core services.
In 2015, Meituan expanded once more into transportation ticketing with train and airplane tickets.
The company also announced a merger with Dianping.com, a restaurant reviews website launched in 2003 that is kind of like China's Yelp.
Dianping had good traction in first and second-tier cities like Shanghai. But they lagged behind in China's other urban areas. The merger allowed Meituan to add Dianping's established customer base to its own and consolidate the industry.
The merger was pitched as a combination of equals and the two companies would collaborate on innovation. But Wang quickly sidelined Dianping's founder Zhang Tao and replaced the team with his own.
The new company emerged as a heavyweight in the Chinese tech landscape. They raised money and continued their horizontal expansion throughout the Chinese local services ecosystem.
In 2018, Meituan went public on the Hong Kong stock exchange, raising $4.2 billion at a valuation of $50 billion. The stock has done well since then and today it has a $220 billion market cap.
Meituan's Product Lines
Meituan is a sprawling beast with over 200 offered services but its product lines are all centered on offline services ordered online.
You have the aforementioned Maoyan, its movie ticketing service.
Its food and grocery delivery services - Waimai and Meituan Grocery. The company has majority share - around 65% - in the Chinese food delivery business.
Alibaba-backed leading competitor Eleme has less than 30%. More on this one later.
Its travel and hotel booking products. Meituan has majority share of the Chinese online hotel booking market according to their Q3 2020 earnings report.
Meituan services more than just consumers too. In 2016, the company launched supply chain, online advertising tools, and cloud-based enterprise resource planning software for their many small business merchants. This is their first expansion into software and it helps lock those businesses into the Meituan platform.
The company makes revenue from sales commissions, online advertising from vendors on its platform, and other service fees. Fiscal Year 2020 revenues totaled $17 billion USD.
Meituan’s Food + Platform Strategy
WeChat is China's most famous super-app. What started out as a simple chat app has bundled together various parts of people's lives to meet all of their daily needs. Meituan follows a similar strategy - referred to in its annual reports as "Food + Platform".
Meituan has built proficiencies in delivering many types of items. For instance, they recently added delivery of flowers, medicines, and more. But the biggest revenue and profit drivers are food and groceries.
The food delivery business is so important because it is so commonly used in China. Like with the rest of the world, the pandemic has accelerated food delivery adoption. Over 421 million Chinese have placed a food delivery order - 86% of whom are white collar workers. Furthermore, they use it quite often - an average of 25.5 transactions in 2019.
Since food delivery is so frequently used, it drives traffic for Meituan's other services like travel bookings, in-store dining, and even wedding planning. That is the platform part of the "Food + Platform" strategy. Cross-selling these local services makes Meituan even more of a destination for Chinese consumers.
Furthermore, that titanic transaction volume helps drive scale. In 2020, Meituan hired 9.5 million drivers - more than the population of Austria. This titanic scale lets them dispatch their deliverymen on the most optimal routes, minimize downtime, and be the low-cost leader.
Between Two Giants
Meituan had been one of those rare companies with backing from both Alibaba and Tencent, rivals in the Chinese internet space.
Wang had originally raised money from Alibaba. But after the 2015 merger with Dianping, Tencent as a Dianping investor had the option to invest in the combined entity. They did, pitching in a billion dollars in a 2016 fundraising round.
Tencent's friendly relationship with Meituan continues to this day with the latter's favorable feature placement within the WeChat ecosystem.
Alibaba sold their stake at a discount from the 2016 round, citing their focus on their own homegrown online-to-offline services division.
In an interesting 2017 interview, Wang talked a bit about Meituan's relationship with the two titans. He likened it to China's relationship with the United States and the Soviet Union. Which is pretty fun to think about, if you are familiar with that stuff.
After the Dianping merger, Wang went to Jack Ma and Daniel Zhang, today Alibaba CEO, to talk about resetting relations:
> I thought we could learn from the successful merger of DiDi and Kuaidadi. Alibaba and Tencent fought endlessly. Eventually they shook hands and made up, and now they are both shareholders of DiDi.
> And so I told Alibaba that Meituan sincerely hoped it could receive support from both Tencent and Alibaba, but they said: “You are completely mistaken. We think the consolidation of DiDi and Kuaidadi was a failure. We will not make the same mistake again.”
Alibaba thereafter began developing several directly competing services. As Meituan finished up on 2020, they warned investors to expect several quarters of operating losses as the company continues its battles and expands into community buying. To fund this expansion, the company raised $10 billion by selling debt and equity.
Stirring Up Dust
Wang is so willing to stir up dust with titans like Alibaba because he is in general very comfortable with competition. Meituan's style of horizontal expansion means charging forward into a field of crowded incumbents.
This latest competitive push takes Meituan into "community purchasing" with its Meituan Select service. Community purchasing is a new Chinese e-commerce trend where communities can set up local groups for bulk buying.
It is kind of like Groupon, but more localized. Pinduoduo pioneered this model, where people can band together to "unlock" group discounts. Founded in 2015, Pinduoduo is now worth $140 billion and its founder Colin Huang is one of China's richest people.
The community group buying concept began in China's hinterlands - massive cities with millions of people that nobody has heard of like Dandong, Panjin, and Fushun. It is a titanic market estimated to be worth $100 billion in 2021.
Meituan is not going to win it without a fight. Meituan Select directly competes with JD.com’s Dingdong Maicai, Xingsheng Youxuan, Pinduoduo’s Duo Duo Maicai, Alibaba’s Taobao Maicai and Didi Chuxing’s Chengxin Youxuan.
I should mention. Interestingly enough, Pinduoduo is also a Tencent investment, having scaled up in their early days through their usage of WeChat groups and mini-programs. The Meituan team is definitely not afraid of stepping on their siblings' toes.
Wang is a student of history. In interviews, he quotes Chairman Mao and cites the Hundred Regiments Offensive - a glorious WWII Chinese victory commanded by CCP-KMT general Peng Dehuai. He would be a great asianometry viewer.
Considering Wang’s knowledge of history, a recent deleted post on his social media is worth closing with. May 2021, he posted on the social media network Fanfou.com a 1,000 year old poem by Zhang Jie titled "The Book Burning Pit". Then he deleted it. Cuz he knew he done goofed.
The stock crashed to a seven month low as the market immediately saw the post as a criticism of Beijing and its recent anti-trust moves. The Chinese government has been very sensitive of such things - starting with the very public beat down of Alibaba Group after the Jack Ma's speech.
Meituan is very comfortable with conflict. They have carried their zen through years of battles and horizontal industry invasions. But now perhaps they have come across an opponent against which they cannot win.