Wednesday, 2024 April 24

Meituan’s Zhang Chuan on the company’s “trench warfare” with Douyin and other competitors

Amidst the challenges facing Meituan’s in-store business, Zhang Chuan, president of the company’s in-store business group, issued a new year’s message to employees at the beginning of this year. This internal communication, rare for Meituan’s top executives, comes at a sensitive time.

As one of Meituan’s top ranks and a product-centric leader, Zhang Chuan maintained his usual clarity and directness in this internal memo, which was over 4,200 words in length. The memo reiterated Meituan’s moat amidst current challenges, stating that the only way to solve them is to “take to the frontlines, head to the battlefield.” He also set forth various demands for employees, including changes to work and writing styles, reorganizing workflows into closed loops, and prioritizing results.

The use of terms such as “battle,” “war,” and “campaign” appears over ten times in this message, a vocabulary Meituan hasn’t used much in recent years. An employee from Meituan’s in-store business commented, saying that “using war as an analogy indicates paying a high level of attention to competition, with a mindset of life or death.”

The challenges faced by Meituan’s in-store business have been likened to the Battle of Stalingrad, where the Soviets secured victory despite being weaker than the German army. “The crucial point is whether the in-store business team believes they can win,” Zhang emphasized.

The following excerpts are from Zhang’s memo and have been edited and consolidated for brevity and clarity:

  • Competitive landscape: Platforms like Douyin, the Chinese equivalent of TikTok, offer significant marketing “firepower” to merchants. Despite similar pricing and subsidies, Meituan’s sales still lag behind. Short-term differences in business models are challenging to bridge, even with events like coupon festivals and livestreaming.
  • User competition: The internet is entering a phase of competing for existing users. Platforms now have to provide a full range of services. Competitors are getting stronger, and weaknesses of those surpassed by Meituan are now disappearing. Resource investment is not unlimited, and the final outcome is defining the boundaries of each strong competitor.
  • Core positioning: Product shelving and prices determine the core positioning of future in-store businesses and should be the guiding principle for all work.
  • Subsidies and user growth: Subsidies lead to user growth, not a “war” of attrition. Product and operations teams must be at the front lines, experiencing and analyzing the needs of merchants and users firsthand. The approach to operations and the mindset of business development must change.

Is the moat of Meituan’s in-store business still intact?

In his internal memo, Zhang was reflective, acknowledging the ups and downs experienced by Meituan’s in-store business in 2023. He highlighted chaotic moments, setbacks against competitors, but also phases when Meituan “captured crucial strongholds.”

Facing the formidable presence of ByteDance’s Douyin in 2022, Meituan hardly responded throughout the year. A Douyin representative once remarked that “every time [Douyin] takes a step, Meituan is expected to counter immediately, but there was never a notable response.”

However, Meituan internally anticipated Douyin’s entry into local lifestyle services. As Douyin’s live broadcasts’ conversion rates seemed subpar at the time, and the vertical was inherently challenging to penetrate, caution seemingly prevailed.

It wasn’t until Meituan’s key accounts started to shift to Douyin, achieving astonishing sales through livestreaming, that internal alarms began to sound off. A tangible sign was Douyin starting to capture advertising fees from merchants. Typically, the gap between Meituan’s commission and advertising revenue fluctuated by around 5%, but by Q4 2022, the latter trailed the former by 18 points.

The gravity of this situation prompted Meituan to respond in early 2023, launching projects centered around discounted group-buying and livestreaming. In Q3 2023, Meituan’s sales and marketing expenses surged by 56.4%, far exceeding revenue growth.

Top-level executives at Meituan also actively conducted in-store research. From October to December 2023, Zhang visited several “county towns” to understand the on-the-ground situation and what Meituan could do.

At that time, Meituan faced a situation where, despite having a cheaper supply than its competitors, sales significantly lagged. While products were regularly rotated, user sentiment and growth remained largely unchanged, causing anxiety among in-store managers.

A dramatic incident took the form of Dianping, an on-demand delivery platform under Meituan, blocking Tai Er, a Sichuan food chain specializing in Chinese-style sauerkraut fish, triggering public criticism in the social circle of the chairman of Jiumaojiu, the company behind Tai Er. The incident was attributed to Tai Er disrupting its pricing system on Dianping by livestreaming on Douyin, leading to its “execution.”

However, insiders told 36Kr that the actual issue was that, in the months before and after the incident, customers of Tai Er had been asked to refund Meituan’s group-buying vouchers and utilize promotions from Douyin instead, angering Meituan.

The underlying significance of this incident is the influence of each platform and which platform merchants prefer. This is a matter Meituan takes very seriously.

Regarding the challenges facing Meituan’s in-store business, Zhang openly admitted that past entry barriers are no longer as powerful after years of market development. Nonetheless, he believes that the moat of Meituan’s in-store business is still intact:

  1. Zhang highlighted the common user mindset of wanting low prices, fast deliveries, while having access to a comprehensive range of high-quality products. According to Zhang, while Meituan’s past system offered variety and quality, it did not succeed in capturing users seeking low prices. Through new businesses such as discounted group-buying and livestreaming, Meituan has ostensibly found new users, unveiling an opportunity for its in-store business to take off again.
  2. Meituan’s merchant packages and prices could remain unchanged for up to a year in the past. Now, with prices kept low daily, the structure of Meituan’s packages must change with the times and according to the preferences of individual customers. To encourage merchants to offer more competitive packages, Meituan adjusted its previous annual framework (where merchants only needed to meet a gross transaction value quota for the entire year) into a quarterly framework. Now, commission rates are renegotiated every quarter based on the merchant’s performance from the previous quarter. They are also required to list consistent prices for group-buying vouchers regardless of the platform.
  3. Zhang believes that local merchants typically operate on smaller scales and therefore record lower net profits. Meituan’s strength lies in charging lower commissions, involving fewer profit-sharing participants, and offering efficient tools and straightforward processes.

Wang Xing, CEO of Meituan, stated a decade ago that group-buying is a low-cost business that leverages structural cost advantages. Some livestreaming multichannel networks (MCNs) told 36Kr that, after factoring in service provider commissions, influencer scouting fees, and business costs, Douyin’s overall costs surpass those of Meituan. “As long as Meituan staunchly maintains its cost advantage, keeping the take rate at the breakeven point with Douyin, it can curb the expansion of competitors.”

Securing the moat: Be hands-on and prioritize results

Zhang’s assessment is that Meituan’s competitors are getting stronger with fewer weaknesses, necessitating the team to engage more actively with merchants to understand on-the-ground changes. This would pave the way for the establishment of a daily low-price system, the redesign of its sales, operating, and reporting systems, until supply stabilizes.

Zhang outlined three requirements to fulfill this goal:

  • Change the writing style: Simplify reports by making them brief and reduce the time spent on writing and reading articles.
  • Change the work style: Take responsibility for results, avoid incomplete projects, and steer clear of projects that are undertaken simply for the sake of reporting—focus on tasks that can deliver tangible results.
  • Establish closed loops: Whether it’s a physical or virtual organization, demand accountability, forming a closed-loop assessment of organization and results.

These requirements were framed by Zhang as a necessary response to the changes in Meituan’s users and supply.

Regarding changes in users, Zhang highlighted that new users are mainly attracted to the price-based group-buying product model. While it has fewer SKUs, it addresses common user scenarios with extremely favorable prices. Meituan’s new users are likely those seeking absolute low prices and can be a main force in helping the business transition from fulfilling 10 million orders a day to 50 million orders.

Price-based group-buying has been one of the fastest-growing businesses for Meituan in the past few months. It competes directly with Douyin’s group-buying packages, featuring products from brands in the top 50 cities—similar to Douyin—while aiming to offer lower prices. According to 36Kr, this business exceeded 3 million daily orders in Q3 last year, becoming the main source of new users for Meituan.

The arrival of new users also inevitably requires Meituan to update its supply model. Zhang’s suggestion is to continually find “flagship products” while maintaining active communication about pricing.

More importantly, Zhang hopes that the in-store business team will shift from the previous assessment method focusing on the number of newly signed merchants to prioritize the quality of communication with merchants.

To achieve this goal, Meituan’s in-store business has undergone extensive organizational changes:

  • In October 2022, Meituan shifted from an agency model to a direct sales model in some tier-three and tier-four cities to better serve local merchants.
  • In March 2023, Meituan’s catering department established a new business development department to oversee CKA merchants as well as small- and medium-sized merchants directly. CKA is one of three classifications to indicate the scale of a merchant, indicating a notable but not large number of chain stores. Other classifications include KA and ordinary. In the new department, comparisons with competitors are included in sales assessments for the newly established team, accounting for around 50% of weightage.
  • By November 2023, Meituan had split the channel development department under the in-store business group (mainly in an agency model) and directly integrated it into departments such as catering, aiming to operate directly in lower-tier cities for better control over merchants.

These changes are painful and uncertain. Some departing employees of Meituan’s catering business complained on the intranet, stating that team adjustments were too frequent, tools provided were inadequate, management was rough, subsidies were wasted, and there were instances of falsified performance.

These claims became viral for a period, and while Zhang acknowledged that this is a necessary process, it will not become the norm.

When will this “war” end? Zhang’s conclusion is that this is not a short-term battle but a brutal and agonizing “trench warfare.”

Using an example from the Korean War, Zhang cited how China’s forces initially wanted to annihilate entire divisions and regiments of the US army at one go. When they subsequently decided to abandon this idea, the result turned out to be superior.

Zhang’s point of citing this analogy is to allude to the idea of Meituan needing to abandon the idea of “devouring competitors in one go.” He believes this is a prolonged competition that is fought based on attrition as each opponent is versatile. However, he feels that this won’t be an endless battle, as each competitor is rational and will not endlessly invest resources. To win, Meituan must be capable of confirming where the boundaries lie for each contender.

KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Dong Jie for 36Kr.

KrASIA Connection
KrASIA Connection
KrASIA Connection features translated and adapted high-quality insights published on 36Kr.com, the largest and most influential technology portal in Chinese language with over 150 million readers across the globe.
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