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In tech-savvy China, fundamental industries – food, health, and education – have been rapidly evolving in the direction of online-based business models. The food delivery giant Meituan recently released its earnings report for the first quarter of 2021, including details on various user acquisition tactics and plans for future development. Concurrent with antitrust regulation and some underperforming new business initiatives, what can we expect from the company in the near future?

• On May 28, 2021, Meituan, the Chinese shopping platform known for food delivery and retail services, released its earnings report for the first quarter of the year.

• During this quarter, Meituan generated over CNY 37 billion (around USD 5 billion) in revenue, with a YoY growth rate of 120.9%.

• The food delivery services, Meituan's core business segment, accounted for around 54% of the total revenue, doubling the amount from the same period last year.

• Food delivery, in-store, and hotel & travel segments have shown a solid post-COVID recovery trend.

• Potential risks include the current crescendo of antitrust regulation in China's Internet industry and operating losses from Meituan's new business initiatives.

• Despite the present risks, we consider the company to be worthwhile for long-term investment.

Through leveraging the strengths of faster Internet connectivity and mobile apps, China's major local life service platform, Meituan, has grown to comprise over 200 service categories, including but not limited to on-demand delivery, bike-sharing, catering, movie ticketing, and other lifestyle services. Meituan's fundamental business strategy revolves around the 'Food + Platform' concept while prioritizing food delivery services in its business mix.

According to Meituan's Q1 2021 earnings statement, the company's business has achieved a strong recovery, benefiting from the Chinese state's effective epidemic control and prevention measures. Noticeably, its food delivery, in-store, and hotel & travel segments experienced stellar growth, aggregating operating profits. These three segments have pushed Meituan to gain over CNY 3.9 billion in Q1 2021, up by more than 15% compared to the same period of 2020. To evaluate this company's future potential, we will be inspecting both internal and external factors that impact Meituan's business performance from all dimensions.

Food Delivery

Online shopping has undeniably become one of the key lifestyle trends in China’s fast-paced society. Along with the surging demand for food delivery, Meituan has come to ride the headwind, expanding its customer base by popularizing its mobile food ordering app over recent years. To secure solid growth for its food delivery services, Meituan provides an e-platform for individuals or families to purchase food online, including daily meals, liquor, snacks, and groceries.

During the first quarter of 2021, Meituan seized the opportunity of China's Spring Festival to launch 'Open for Business' initiatives to collaborate with millions of merchants and provide consumers with convenient deliveries. Through additional promotional campaigns, the company's quarter deliveries exceeded expectations, with an increase of 113.5% in daily average number of food delivery transactions. In this quarter, the company's operating profit from food delivery was also stunning, accounting for CNY 1.1 billion compared to a loss of CNY 70.9 billion for the same period of 2020.

These achievements resulted from Meituan's business adjustments during this quarter, via which the company has broadened its services to satisfy the constantly evolving consumer needs. Specifically, the company expanded its service scope to long-distance delivery orders while continuously refining the differentiation of merchant types.

In the same quarter, Meituan witnessed a dramatic growth in order volume as customers are inclined to purchase from high-quality merchants. Directly correlating with the industry digitalization, many merchants or restaurants offer both dining-out and order-in services to enhance business efficiency. 

Meituan is known for its inclusive incorporation network, connecting small- and medium-sized merchants to diversify product categories and service types. This strategy serves as another growth engine for maintaining high delivery capacity and ensuring optimal user experiences in different shopping scenarios. To respond to rocketing delivery demands, Meituan also released plans about better rider welfare by ensuring adequate delivery capacity and paying to ensure the protection of the rights of its delivery riders.

In-store, hotel & travel

In contrast to social lockdowns last year, in-store businesses have gradually recovered, benefiting from the effective containment of the COVID-19 epidemic in China. The increased consumption scenario in in-store businesses, such as restaurants and hotels, has resulted in a dramatic sales growth for Meituan in the first quarter of 2021.

In detail, the company's in-store hotel & travel segment revenue jumped to CNY 6.6 billion, up 112.7% YoY during this period. Meanwhile, its operating profit increased 304% to CNY 2.7 billion compared to CNY 680.2 million in the same period of 2020.

We consider that the main drivers for Meituan's business growth are the company's 'Open for Business' initiative for Spring  Festival, as indicated in the increase of gross transaction value and volume. Specifically, during the Spring Festival this year, Meituan achieved a nearly 30% two-year compound annual growth rate in gross transaction value in Q1 2021.

Even though the PRC government did not recommend traveling during the Spring Festival due to public safety concerns, Meituan has continuously expanded its high-star hotels and achieved over 100 million domestic room nights in Q1 2021. For low-tier cities, the company still includes the blueprint of building low-star hotels to enhance brand awareness and improve offline traffic conversion.

Downsides emerged as the company brought in new initiatives 

Regardless of the steadily impressive growth, Meituan's new business initiatives nonetheless brought a greater operating loss in the first quarter of 2021. Particularly with the company's expansions in retail businesses, B2B food distribution services, and ride-sharing services, the company has ramped up its investments to cultivate the e-commerce business.

But the results were not optimal, with an operating loss of CNY 8 billion for these segments, while the operating margin also decreased to negative 81.6%. According to the earnings report, Meituan claimed that its substantial upfront investments in the e-commerce industry resulted in growing operating expenses. 

The company's plans require considerable investments because it has been trying to strengthen its warehousing and logistics network to reach a broader spread of consumers, especially in less-developed regions. At the same time, the company has been managing to deliver value-for-money products with a better affordable pricing strategy to increase user retention.

Even though the operating losses might be a warning sign for possible downfalls in Meituan's business performance, the company has consistently implemented strategies to boost B2B food distribution services shown in its Insta-shopping platform.

China's antitrust regulation thus far has a minor influence on Meituan 

Under the State Administration of Market Regulation (SAMR), Meituan has been one of the targeted companies of China's recent antitrust probe. This investigation aims to prevent monopolies, partly by assessing whether a company forces vendors to use their platform exclusively. The probe was initiated with a designation of 'Choosing One From Two.'  It also serves as a sign for China to restrain a single firm that unreasonably imposes competition by conducting monopolistic practices. 

According to Reuters, Meituan had a market share of around 68.2% in China's food delivery market by the second quarter of 2020. This antitrust regulation is an explicit indication of China aiming to regulate the Internet economy and eradicate any dominant positions led by industry giants. One of China's largest online retailers, Alibaba, is a classic example, having been fined USD 2.8 billion after this investigation.

However, this probe still continues to be unharmful to Meituan's business as there is no current accusation or penalty to the company so far. Despite the interim period might be unnerving for Meituan's investors, we consider the risk to be minimal.

In a nutshell

Meituan's Q1 2021 performance is strong with its growing food delivery, in-store, and hotel & travel segments. Partially, its enhanced performance resulted from the effective containment of the COVID-19 epidemic in China. Also, the company seized the opportunity of the Spring Festival and a new business model integrated with digitalization to increase sales volume.

Even though its new initiatives impeded its operating profits for Q1 2021, the company does not seem concerned about this temporary loss because it prompted the company to accelerate future development. China's antitrust regulation has alarmed its investors, but this need not be seen as an urgent crisis. We consider that Meituan will not be impacted severely by this regulation and will eventually recover from its operating loss through its well-planned business strategy.