Meituan: A Fortune China 500 company with a loss of CNY 110 billion
Fortune China recently released the “Fortune” China Top 500 list. 30 companies within the list failed to achieve a profit with a staggering total loss of CNY 177.1 billion.
Among the “2019 Top Money Losing Enterprises”, Meituan comes in first with a staggering loss of nearly CNY 115.5 billion with revenue of only CNY 65.2 billion. In other words, for every Chinese Yuan earned, it costs them 1.8 Yuan. What’s more interesting is that the loss by Meituan is nearly twice that of the other 29 companies; accounting for 65% of the total loss. For the past four years, Meituan has always been losing money. How much longer can Meituan burn their cash? Where will the “irrational strategy of burning cash” leads them to?
Wang Xing, an entrepreneur at heart
Wang Xing, the founder of Meituan has always been an entrepreneur. Prior to Meituan in 2010, he had previously founded 2 other startups; one in 2005 (校内网) and the other in 2007 (饭否网). Both ventures were not as successful as he had hoped them to be. In 2010, Wang Xing re-emerged and founded Meituan prior to Groupon entering the Chinese market. The Chinese group buying market grew from zero to more than US$150M in less than a year with more than 5000 group-buying startups competing. Every single major platform adopted the approach of using cash to subsidize users purchases.
Credits to Meituan, they became the sole survivor of the group-buying market and even fend off Groupon. Like the competitors, Meituan also adopted the approach of using cash to subsidize users, where they differ is how segment the territories and where they choose to put their money.
Strategy 1: Choosing the right territory
Meituan subdivided the territories into 5 levels, S-A-B-C-D. ‘S’ is for what we called 北上广深, referring to Beijing, Shanghai, Guangzhou and Shenzhen; the Tier 1 cities.
‘AB’ is for the provincial capital and vice-provincial city, and ‘CD’ is for the Tier 3 and lower cities.
Unlike other competitors who focused on the Top Tier cities, Meituan focused on the AB-class cities. Meituan managed to obtain positive cash flow through these cities and this helps in this war of attrition and endurance. As they make inroads to the S-class cities, a lot of their competitors are already faltering and consolidation was imminent.
Strategy 2: Securing their supply partners and understanding their customer segment
Most competitors use the funds raised to incentivize users purchases and retain traffic ‘active usage’ of their app. However, the moment the incentives are removed, so too is the daily users. Meituan understands that the key to attracting a user to stay for the long term is not ‘subsidy given by the platform’ but to focus on what the merchants need. Meituan started providing subsidies and incentives to selected quality local merchants, promising sales to them and in return requesting for exclusive cooperation and finally, give subsidies to users to realize their commitment.
A year later, all other group-buying (团购) sites closed down and Meituan was the one left standing. Through this, transaction volume rose against the trend and Meituan continues to scale and expand. By 2014, the annual turnover of the Meituan exceeded CNY 46 billion, an increase of more than 180% compared with 2013, and the market share accounted for more than 60%. In the first half of 2015, the total transaction volume of the Meituan reached 470 billion, an increase of 190%.
Meituan Act II
It only seems like yesterday that Meituan managed to survive the hard-fought battle against 5000 competitors in the group-buy market. Before they know it, Meituan found themselves in the middle of the next growing market; the food delivery market.
This time round, competition comes in the form of Alibaba, Baidu.
Once again, Meituan dusted their cash burning playbook, joined the battle and added the capability of data analytics.
Drawing on their experience in the group-buy war, Meituan divided the cities of the country into S, A, B, C, D, E1, E2, F1, G1, G2 all the way up to more than 10 levels.
The categorization is through a combination of consumption level of the city, per capita GDP, and the number of restaurants. Then, each city, especially a large city, is divided into several business coverage zones internally (also known as “蜂窝”).
Each zone has different resources and is assessed independently on their resource needs. Through the system, Meituan is able to assess if a particular merchant is more profitable or loss-making. With such information in place, they are able to deploy resources accordingly.
In 2016, Meituan food delivery grew from 200 cities to more than 1,000; opening new 3 new cities coverage every day. By 2017, Meituan has captured over 50% of the market share. The market leader has emerged and with its consolidation. Once again, Meituan has become a winner.
7 years since it founded, Meituan has survived and conquered 2 fast-growing market disruptions. Despite that, there is a certain unease. CEO Wang Xin knows that for a service platform like Meituan, the true value of the platform depends on whether their products or services is complete or not.
Meituan Act III
Meituan set its sight to be the one-stop app to cater to the consumption behaviour of the ‘lazy economy’; one where users believe in spending more time on work, commuting and life and conversely spending less time shopping at brick-and-mortar malls, cooking and house cleaning.
To strengthen its moat, Meituan layout its strategy to build an ecosystem. One that focuses on the “lifestyle”; eating, drinking and entertainment.
Today, the main business of the Meituan consists of three major components: catering takeaways, shops, hotels and tourism, new businesses and others.
Among them, the new business includes the 美团打车 (Didi or Uber equivalent), Mobike bicycle, 榛果民宿 (similar to AirBnB), and the 小象生鲜.
Meituan truly believes that their business units have synergy and what they provide will help businesses achieve operational and management efficiency; hence reducing cost and increasing efficiency.
However, the reality is far from ideal. Such integration means more investment.
Looking at the earnings report of the Meituan, we can find that the biggest loss is attributed to the continuous expansion of the new business. In 2018, the new business of Meituan achieved revenue of 11.2 billion, but the cost was 15.5 billion with a gross profit margin at -37.9%.
Among the list of key losses, the biggest culprit was Mobike. A single acquisition which Meituan acquired with a loss of 4.55 billion yuan. It contributed to more than half of the loss in Meituan.
With the new businesses facing various challenges, Meituan’s main business is also facing slowing growth. According to the financial report data, the growth rate of the Meituan’s food delivery service has fallen. From 2016 to 2018, the growth rate of this part was 2934.40%, 296.75% and 81.36% respectively.
With slowing growth, poor execution into new markets, Meituan find themselves once again challenged by competitors. This time, it includes Ctrip and Fliggy (飞猪) in the hotels, flight, travelling space.
Will Meituan be crushed under their own debt burden through expansion? The idea of a single ecosystem and be the one-stop app to cater to the ‘lazy economy’ is good, but will reality allows it?