Meituan tries to get through the "irrational period".

The second quarter marked the real start of the "food delivery war." The uncertain competition has put Meituan, the "defending champion," under the spotlight as people eagerly await its performance report.

During this quarter, Meituan's revenue reached 91.8 billion yuan, a year-on-year increase of 11.7%. The core local commerce segment, which was most affected by the competition, saw its revenue grow by 7.7% year-on-year to 65.3 billion yuan. However, its operating profit dropped significantly by 75.6% year-on-year to 3.7 billion yuan, and the operating profit margin decreased by 19.4 percentage points year-on-year to 5.7% - clearly under pressure.

On one hand, there are the fierce new competitors and the subsidy war right around the corner. On the other hand, Meituan is undergoing its own business adjustments and making long-term investments.

In its new business, Meituan has finally completed the implementation of its adjustments and restructuring. In the grocery retail segment, Meituan Select, which had been incurring losses, withdrew from regions with poor performance. More resources were concentrated on Elephant Fresh, making its direction and strategy clearer. Keeta is also constantly "charging forward," establishing a foothold in Hong Kong, expanding into new cities in the Middle East, and is now heading to Brazil in Latin America.

In the second quarter, the revenue of the new business segment increased by 22.8% year-on-year, mainly driven by the expansion of Elephant Fresh and the development of overseas business. The operating loss was 1.9 billion yuan, a 3.1-percentage-point improvement quarter-on-quarter.

Elephant Fresh and Keeta correspond to the trends of "instant retail" and "ocean exploration" respectively. However, compared to the intense competition in the food delivery sector, they are still "future stories."

How will Meituan face the current situation? In the earnings conference call after this quarter's report, the management mentioned the three basic elements of "supply, delivery service, and price" very frequently. It seems that Meituan is determined to return to the fundamentals and use "the right things" to deal with long-term competition.

Founder Wang Xing mentioned that this is not the first time Meituan has faced such fierce competition. Over the past years, Meituan has grown and expanded through competition. He emphasized that Meituan opposes "involution" and also showed calm confidence. "That being said, when the competition continues and intensifies, we will do our best to defend our market position."

Under Performance Pressure: Meituan's "Short-Term Pessimism" and "Long-Term Optimism"

Let's focus on the most competitive food delivery business. What has the subsidy war brought to Meituan?

The most direct impact is the increase in order volume and the number of users. In the second quarter, the monthly active users of the Meituan App exceeded 500 million, and the average annual transaction frequency per user reached a new historical high. In July, after the competition further intensified, the peak daily order volume of Meituan's instant retail exceeded 150 million, which is almost a figure that maximizes demand and also set a new historical record for Chinese food delivery platforms.

As expected, the demand stimulated by large-scale subsidies is not equivalent to the value of normal orders. In the second quarter, the year-on-year growth rate of Meituan's instant retail GTV remained the same as the previous quarter, but the AOV (average order value) decreased. The revenue growth of the core local commerce segment, which was 65.3 billion yuan with a 7.7% increase, lagged far behind the scale growth.

Behind the current performance pressure is the inevitable increase in various subsidies, that is, costs and investments.

On one hand, the growth rate of the delivery service revenue of Meituan's core local commerce segment was far lower than the growth rate of the number of instant delivery transactions. "This is mainly due to the significant increase in subsidies deducted from the delivery service revenue to cope with the fierce competition."

On the other hand, from the composition of cost expenses, we can see that both rider subsidies and user incentives have increased. In the second quarter, the cost of sales of the core local commerce segment increased by 27.0% year-on-year to 61.4 billion yuan, and the percentage of revenue increased from 58.8% to 66.9%. This is mainly due to the increase in rider subsidies and costs related to overseas business. The sales and marketing expenses increased by 51.8% year-on-year to 22.5 billion yuan, and the percentage of revenue increased from 18.0% to 24.5%. Promotion, advertising, and user incentives during the competition are all the reasons behind this.

The growth of revenue and order scale is temporarily out of balance, and costs and expenses are inevitably increasing. As a result, profit is under pressure. However, Wang Xing believes that the temporary scale expansion driven by large-scale subsidies will not bring about industry progress. This is also the reason why Meituan firmly opposes "involution." Its goal is to return to the track of value creation. "We are fully confident to surpass short-term fluctuations and maintain healthy and high-quality growth in the long term."

What does long-term growth mean and how should it be analyzed? The thinking of Meituan's management has clearly returned to the most basic common-sense logic of the business. In the conference call, they repeatedly emphasized the three basic capabilities of "supply, delivery service, and price," which is also the logic that Meituan presented to potential investors during its IPO roadshow in 2018.

Meituan CFO Chen Shaohui said, "As long as the investment can help us consolidate our long-term capabilities, Meituan will be very determined to make the investment. However, we don't like to make irrational expenditures in an unsustainable way. Focusing on ROI is very important."

This also reflects Meituan's current investment strategy. In addition to the visible user subsidies and rider incentives, Meituan has also been optimizing its own efficiency and building a more long-term ecosystem.

Innovation on the supply side of food delivery has achieved results. Firstly, there is the "brand satellite store" model, which helps merchants carry out food delivery business at a lower cost. As of July, Meituan has jointly opened more than 5,500 brand satellite stores with more than 800 leading chain catering brands and plans to open more than 10,000 by the end of this year. "Pinhaofan" and "Shenqiangshou" have lowered the unit price and improved the delivery efficiency by concentrating demand. Since February this year, 117,000 merchants have launched the "transparent kitchen live broadcast" on Meituan, and it is expected that this number will exceed 200,000 by the end of 2025.

The latest innovation on the supply side is the "Raccoon Kitchen." Based on the centrally invested and built offline takeaway kitchens, Meituan serves as the overall operator and supervisor, allowing merchants to move in easily and achieving centralized management and full traceability. According to the person in charge of this business, the goal is to have 1,200 Raccoon Kitchen stores in the next three years. Currently, more than a dozen stores have been put into operation in Beijing and other places.

The rider support system is also being rapidly established. Since July 1st, Meituan has fully paid the "work-related injury insurance" for all riders in 17 provinces and cities. After successful pilot projects in Quanzhou and Nantong, the rider endowment insurance subsidy will cover the whole country by the end of this year. Humanistic care such as the "Rider Home" and the "Rider Serious Illness Care Program" is also being strengthened. In terms of financial impact, securities firms previously generally predicted that the full-scale social security subsidy might drag down Meituan's average profit per order by 0.3 - 0.4 yuan. However, since this issue also involves factors such as specific contract signing and rider willingness, the actual impact remains to be evaluated.

Food delivery was originally a "hard business" of "picking up small change." Now, under the white-hot competition, it is passively experiencing a long-lost "craze" and "extensiveness." However, when industry subsidies return to a reasonable level, whether this business can be done "precisely enough" and whether the future layout is "perfect enough" will still be the key to determining the long-term pattern.

Seven years ago, Meituan set a "grand" goal for its instant delivery business - by 2025, the average daily order volume would increase to 100 million, and an average profit of 1 yuan would be earned per order. Behind this is a 3% profit margin, which Meituan believes is a reasonable profit level.

In the past quarters with little competition, Meituan proved the feasibility of "1 yuan profit per order." From the second quarter, when competition was the fiercest and demand was prematurely stimulated, the figure of "100 million orders per day" has also become a reality.

However, these two goals have never been achieved simultaneously. Meituan believes that it will take some time to achieve both goals. "We are on the right track, so no matter what happens in the market or competition, we will focus on doing the right things."

"We believe that when the competition returns to normal, consumers, merchants, and riders will ultimately choose the platform with a richer supply, higher service quality, and optimal operational efficiency." When answering a question from Goldman Sachs, Meituan's management mentioned these three points again.

The Narrative Beyond Food Delivery: The New Business Channels Are Becoming Clearer

Food delivery is the most perceptible business for consumers at the C-end and is also the most effective way to boost user activity in the competition. However, there is another notable business in instant retail - Meituan Flash Sale. It is a new story that Meituan has been focusing on cultivating in the past few years, and its remarkable growth has directly triggered the current boom in near-field e-commerce.

In October 2024, Meituan officially announced that the number of its lightning warehouses had reached over 30,000, and the latest figure is over 50,000. Recently, the brand expansion of Meituan Flash Sale has clearly "accelerated." Brands such as Bananain, Anta, ONLY, and Hailan Home have all joined. This year, Meituan Flash Sale also participated in the e-commerce festival "618 Grand Promotion" for the first time. During the 618 period, the total turnover of various Meituan lightning warehouses doubled. Among them, the turnover of trendy beverage lightning warehouses increased by more than 6 times, that of mother and baby lightning warehouses increased by more than 4 times, and that of beauty lightning warehouses increased by more than 1 time.

Meituan Flash Sale's business model is generally considered to be able to "indirectly erode" the market share of far-field e-commerce. Therefore, various e-commerce platforms want to enter this field. When talking about the advantages of Meituan Flash Sale, the management also mentioned the three "most basic things" of supply, delivery service, and price. The supply capabilities that Meituan began to cultivate first in 2018, combined with the scale and density established by food delivery and the delivery capabilities developed by Meituan, all constitute its current advantages in instant retail.

Another major component of the core local commerce - in-store hotel and travel. In the second quarter, the order volume increased by more than 40% year-on-year. Among them, the cooperation between Meituan members and high-star hotel groups such as Marriott coincided with the May Day holiday, driving the growth of the hotel business. The rapid growth of food delivery traffic during the subsidy war also promoted the conversion of Meituan's in-store business, and categories such as fitness, photography, and education all achieved strong growth.

All three of these fall under the concept of "service retail." In the past year, the competition that Meituan faced in the in-store field has stabilized. Just as it cultivated the concept of flash sales, Meituan has started to cultivate the new market and new opportunities of "service retail."

Wang Puzhong said at the Meituan Service Retail Conference in June this year that China has become the country with the richest and most convenient service consumption in the world. However, there are only 3 service retail enterprises with a revenue of over 10 billion yuan, and the online penetration rate is only 9%. He believes that in the next 5 years, service retail will accelerate its online transformation. By 2030, the online penetration rate of the service retail industry will increase to 25%, and 300 brands with 1,000 stores will emerge. Meituan wants to be the "pioneer" again.

While the core local commerce has "both good and bad news," Meituan's new business has a clearer direction and strategy than before.

At the end of the second quarter, Meituan Select withdrew from regions with poor performance. While continuing to explore the next-day delivery + self-pickup model, Meituan accelerated the expansion of the pre-positioned warehouse business "Elephant Fresh," which has shown certainty. For many young people, besides food delivery, Elephant Fresh is the most commonly used and relied-on service because buying groceries is a high-frequency demand.

Currently, Elephant Fresh has more than 1,000 pre-positioned warehouses in more than 20 cities, and its performance growth rate significantly exceeds the industry average. After the adjustment of Meituan Select, more resources will also be invested in it. This business has a clear "roadmap" - on one hand, it will accelerate its coverage of all first - and second-tier cities in China. On the other hand, in cities such as Beijing, Shanghai, Guangzhou, and Shenzhen, the business hours have been extended to 2 am to meet night-time demand. In addition, the number of Elephant's private-label products and their contribution to total sales are also increasing.

In terms of profitability, Meituan said, "We never expect the fresh food business to be a highly profitable business." When the scale and efficiency reach a certain level, the "3% profit margin" of the food delivery business is regarded as an empirical rule and also the long-term profit margin goal of Elephant Fresh.

Keeta is another new business that Meituan is focusing on investing in. The earnings report mentioned that the significant increase in the cost of sales in the second quarter was also "related to the increase in costs associated with overseas business." However, the financial indicators are still very prudent and controllable. The loss of the new business segment where the overseas business is located narrowed quarter-on-quarter in the second quarter.

In the second quarter, both the order volume and transaction amount of Keeta achieved strong growth. Currently, Keeta ranks first in the food delivery market in Hong Kong. In more distant overseas markets, it continues to expand its "new map." In Saudi Arabia, Keeta has become one of the top two players. As of the end of July, it has expanded to 20 cities in Saudi Arabia. In August, it further launched its service in Qatar in the Middle East and will officially start business in Brazil in a few months.

For Keeta, Meituan plans to reach an annualized gross merchandise volume (GMV) of 100 billion US dollars in 10 years. Starting from its launch in Hong Kong in May 2023, this goal is targeted for May 2033.

Whether it is the highly competitive food delivery and flash sale business, the well-performing Elephant Fresh, or the overseas business that is being heavily invested in, Meituan has conveyed a consistent concept this quarter - to succeed in the retail business, there is no fancy stuff. "A rich selection of products, fast and reliable delivery, and always affordable prices" are the fundamentals and "the right things." Focusing and doing the right things is the theme that Meituan repeatedly mentioned in