Bytedance, the company behind Tik Tok and Douyin is testing a type of food delivery service in China via Douyin that enables restaurants to promote and sell group-buying packages.
Investors view this move as a serious threat to Meituan’s business and its share price plunged by nearly 20%.
Here we discuss whether Tik Tok will eat Meituan’s lunch. While we think it is unlikely Bytedance will eat the entirety of Meituan’s lunch, every bite will hurt.
What does Meituan do?
Meituan is the largest food delivery company in China with an estimated 67% to 70% market share. Alibaba’s Ele.me a distant second with about 20% to 27% based on various sources.
Due to the market share that Meituan controls, its food delivery segment has been profitable at least since its IPO in September 2018. This is unlike many other players in this segment who are vying for market share in various parts of the world.
How Bytedance plans to capture Meituan’s market share
Bytedance’s intended model is very different from the model currently in place for Meituan as well as Alibaba’s Ele.me, which are both on-demand food delivery services, much like Grab Food, Foodpanda and Uber Eats.
Previously, restaurants often livestream on Douyin to market their business. While doing this, they can offer discounts. A user can then purchase that offer and choose a time for the food to arrive. This features is currently being tested in the major cities of Beijing, Shanghai and Chengdu.
Depending on the results of the test, Douyin will consider expanding the feature to more cities in the future, however there is no detailed timeline for now.
Douyin has set a target of RMB 4 billion in revenue for its food delivery service in 2023, which represents just 2.6% of the RMB 150 billion goal for its local life services unit.
Douyin will commence by offering favorable commission measures to merchants, charging a 2.5% service fee and returning as much as 50% of this fee during its pilot period, whereas existing platforms charge commission of up to 20%.
Meituan’s response to Douyin’s threat
Meituan has unveiled plans to hire up to 10,000 people this quarter, in order to fend off Bytedance’s challenge. The hiring campaign is intended to catch the uptrend in consumer consumption as China opens up and contrasts with vast layoffs in the tech industry.
The recent developments along with the bearish market trend in the short term has caused Meituan’s share price to plunge by nearly 20% since the start of the month to an intra day low of 145 HKD.
Both companies are relying on outside investments to fund their growth
Although Bytedance is not listed, it is reported that Bytedance had incurred more than US$7 million in operating losses in 2021. This was due to Bytedance’s aggressive spending on growth.
Meituan is not profitable either.
Meituan currently funds its new initiatives in segments such as goods retail with profits generated from its Food delivery and its Hotel and Travel segment.
Currently, the operating profits generated from these two segments are already inadequate to support its new initiatives. Should the situation change adversely and Meituan has to share its lunch, then Meituan would have to either raise additional funds to invest on its new initiatives or cut costs.
Meituan’s new initiatives are meant to serve as it’s growth endeavours and should Meituan have to reduce its spend, the company’s overall growth trajectory will start to veer off course.
In a war of attrition, Meituan will likely come up tops as it needs to protect its core business whereas for Bytedance, food delivery is just a small project as compared to its overall business.
Price wars are frowned upon in China
Healthy competition is embraced by the Chinese government. Anti monopolistic actions are not. Alibaba once received a significant fine of US$2.8 billion by the Chinese administration for its online shopping platform practices.
With Meituan having a significant market share, it will be challenging for Bytedance to carry out a long drawn out battle to gain adequate market share. Conversely, Meituan cannot cut prices to starve and kill off Bytedance.
If Bytedance continues to attempt to build a full-fledged service, it could start a battle for market control, which will wipe out billions of dollars in potential revenue. It could even lead China’s regulators to viewing this as a reckless expansion of capital, sparking off a crack down on the endeavor.
Hence the current focus is on service quality. While it is easy to gain a toehold with incentives, it is very difficult for a new player to gain significant market share and then turn a profit by reducing incentives.
Meituan has just lost its backing
In November 2022, Tencent announced that it would distribute the majority of its shares in Meituan to investors, about a year after paring down its stake in JD.COM via the same way.
Tencent has previously explained that its investment strategy is to invest in companies in certain industries during their development stage. The investees would benefit from Tencent’s investment in order to fund their development and expansion.
Tencent would exit the investments when the investees have attained a robust level of financial strength, industry positioning, and investment returns. Tencent believes that Meituan has now reached such a status.
Prosus, the majority shareholder of Tencent would receive a substantial direct stake in Meituan by way of Tencent’s distribution. Although unconfirmed, Prosus has indicated that they are considering to tell the Meituan stake that it would receive.
Although Tencent has a strategic partnership agreement with Tencent as the two companies have a mutually beneficial business relationship, it leaves to be seen as to whether the relationship would continue to be as robust and close knitted as before. This is an overhang on Meituan as many would view Meituan as having lost its backing.
In addition, if Prosus decides to sell its stake in Meituan, Meituan would suffer from persistent share price weakness in the near future and this would inhibit Meituan’s ability to raise equity capital. Debt funding may also cost more as Meituan does not have the same level of support anymore.
This is probably one of the reasons why Bytedance is looking to snatch up Meituan’s lunch.
Is Meituan cheap now?
Maintaining market share in a competitive market such as China is already tough. With an additional player in the scene and one as large as Bytedance, the situation will get likely tougher before it gets better.
Not all is lost for Meituan as not only does the company have a significant market share, it also has a robust balance sheet. Meituan has quickly demonstrated that it is willing to fight to maintain its market share with the large scale of hiring.
Meituan is also considered a reopening play with its Hotel and Travel segment seeing strong increase in volume as it benefits from China’s reopening.
There is also a near term overhang on Meituan’s share price from Prosus’s potential stake disposal in the open market. However, with the share price already down significantly, potential returns could very well be worth the risk.
