Sunday, 2024 May 26

With Douyin looming, Meituan shifts focus back to its core business

What’s the most effective way for a company to reverse its business decline? Perhaps it’s not about pouring money or piling up manpower, but rather changing personnel and adjusting strategies.

In February, when Meituan decided to replace Zhang Chuan with Wang Puzhong as president of its in-store business unit, the outside world understood that the Chinese giant had opted for a different approach to compete with Douyin. Wang’s appointment came at a crucial juncture. Prior to this change, Meituan’s stock price had rarely fallen below its IPO price, nearing HKD 60 (USD 7.6) per share, but after the transition, Meituan’s stock price quickly rebounded, surging over 25% in one month. The effect of changing personnel was immediate.

The rationale behind Meituan’s decision to replace Zhang is subject to speculation. An insider at Meituan told 36Kr that, just the weekend before the adjustment, Zhang was still leading the in-store team to prepare for a closed-door meeting, stating that the change “felt very sudden.” Previously, Zhang had also sent a sincere letter to staff, encouraging them to go to the “front lines.”

Zhang Chuan served as president of Meituan’s in-store business unit until he was replaced by Wang Puzhong during the recent organizational restructuring exercise.

Based on Meituan’s financial report in the final quarter of 2023, its performance was far from as poor as its stock price suggested. In Q4 2023, Meituan achieved RMB 73.69 billion (USD 10.1 billion) in revenue, marking a year-on-year increase of 22.6%. The company’s operating profit reached RMB 1.738 billion (USD 239.8 million), representing a turnaround from losses to profits on a year-on-year basis. Its adjusted net profit also surged by 427.6% to reach RMB 4.37 billion (USD 603 million), with all three figures surpassing analysts’ expectations.

To cope with competition, Meituan has intensified efforts to attract merchants, particularly in lower-tier markets. This initiative has yielded favorable results, with Q4 advertising revenue from Meituan’s core local businesses growing at a rate of 41.4%. This not only narrowed the gap with its commission income growth but also surpassed it outright—the latter’s growth rate the same quarter was 33.9%.

While the low base number of the same period in the previous year should not be overlooked, insiders said that the increase in the number of merchants is the most crucial factor in the rebound of advertising revenue. Previously, the primary concern was that the entry of Douyin would divert merchants’ advertising budgets from Meituan. However, looking at the past two quarters, this trend is slowing down, and merchants are returning to Meituan.

Nevertheless, this situation remains uncertain. In 2024, the core issue for Douyin’s local lifestyle division is commercialization. To address this, it established a new department that specifically targeted the advertising needs of major national brands.

In addition to the performance disclosure, Meituan also revealed a significant detail in its financial report—strategic adjustments will be made to its Youxuan business to significantly reduce operating losses. The management attributed this decision to the slower-than-expected scale of growth, which has resulted in weaker optimization of performance costs. Intense competition has also made it more difficult to increase the markup rate of goods without tapping further into subsidies.

Previously, due to significant losses, Meituan’s Youxuan business severely impacted its market performance. For the secondary market, this could therefore be viewed as a relatively positive signal.

Will Shangou take over after Youxuan’s retreat?

As a cornerstone of the company’s vision, the performance of Meituan Youxuan over the past few years can hardly be described as excellent. Despite continuous efforts to optimize costs and reduce losses, Meituan’s cash flow has been significantly impacted by its Youxuan business. Losses incurred by Meituan’s new business segments in Q4 2023 amounted to RMB 4.8 billion (USD 662.4 million), with an annual loss of RMB 20.2 billion (USD 2.78 billion) in 2023, the majority of which can be attributed to the Youxuan business. In contrast, Duoduo Maicai, another Meituan subsidiary, has nearly broken even.

In Wang Xing’s vision, Meituan Youxuan was expected to bring in an additional 300–400 million users and support Meituan’s takeaway and in-store businesses, becoming one of its key pillars. However, reality has proven to be quite harsh. During its recent conference call, Wang Xing indirectly expressed that “if a new business cannot become a valuable asset, adjustments will be made in a timely manner.” Meituan subsequently decided to pivot its Youxuan business.

Photo of Wang Xing, CEO of Meituan. Image courtesy of Baidu.

Following the announcement of Meituan’s change in strategy, Meituan Youxuan’s central warehouses in some Chinese cities have begun to merge, and subsidies have been reduced. According to Wang Xing, the operating losses of Youxuan in the first quarter have significantly narrowed compared to the same period last year. As the aim is to reduce losses from RMB 20 billion (USD 2.76 billion) to within RMB 10 billion (USD 1.38 billion), it is widely speculated that Meituan Youxuan may gradually exit markets with poorer unit economics (UE).

However, with the retreat of the Youxuan business, the question arises: who will take on Meituan’s new vision? The potential answer lies in Shangou (also known as Flash Shopping). In Q4 2023, Meituan disclosed the daily average order volume of Shangou for the first time, which reached 8.3 million, a historic high, with a year-on-year growth rate of 27.7%. Although this was lower compared to the previous quarter, considering the high base number in the aftermath of the pandemic, this growth rate exceeded public expectations.

Beginning from Q2 2022, Meituan separated Shangou from its new business segments and integrated it into its core local business. The rationale behind this move is that Shangou, like its Waimai (takeaway) business, falls under the instant delivery category and shares a similar business model—both are supported by advertising fees and commissions. However, compared to Meituan Waimai, Shangou boasts a higher average order value, and its UE model is more optimized with the same order volume.

In 2023, Shangou orders surged from 5.2 million in Q1 to 8.3 million in Q4. In the fourth quarter, based on daily average order volume, Shangou accounted for 14.5% of takeaway orders fulfilled by Meituan, compared to 11.6% in the previous quarter. Due to its higher average order value, its gross transaction value has surpassed that of Meituan Waimai, reaching 20%, albeit still incurring slight losses.

In Q4 2023, the loss of Meituan Shangou exceeded RMB 100 million (USD 13.8 million), with an average loss per order of about RMB 0.2 (USD 0.027), compared to a profit per order of RMB 0.9 (USD 0.12) for Meituan Waimai, representing a decrease compared to the previous quarter. Aside from seasonal factors, the primary reason for this decline is the increase in the proportion of low-value orders, which approached 10% in the fourth quarter. Despite driving a notable order growth rate, these orders dragged down its GMV and profit performance for Meituan’s overall takeaway business.

A Meituan insider once told 36Kr that the internal team holds an optimistic view regarding the profit potential of Shangou. Although its volume is not yet comparable to Meituan Waimai, it possesses a superior advertising monetization rate. In 2023, the annual number of active merchants for Meituan Shangou increased by 30% year-on-year, and the number of “flash warehouses” dedicated to Shangou exceeded 5,000, with an increasing number of merchants recognizing the growth potential of quick commerce.

Last year, Meituan Shangou’s GTV approached RMB 150 billion (USD 20.7 billion), nearly three times that of JD Daojia. In an effort to catch up with Meituan, JD Daojia recruited former Meituan vice president Guo Qing to lead the charge. Insiders have previously informed 36Kr that Guo internally demanded a comprehensive benchmarking of Meituan Shangou, aligning its organizational structure accordingly.

Douyin, which remains Meituan’s primary competitor, is also prioritizing quick commerce in 2024. An unnamed source with knowledge of the matter told 36Kr that, not long ago, Douyin’s quick commerce business designed a cooperation framework worth RMB 300 million (USD 41.4 million) with domestic supermarket chain Yonghui Superstores, with branded chain stores listed as its primary targets for business development this year.

Douyin, ByteDance’s short video platform (and the Chinese equivalent of TikTok), has been trying to take a bite out of Meituan’s business for years, leveraging its massive user base to break into various business segments. Image by KrASIA.

Where will Wang Puzhong lead Meituan’s in-store business?

As 2024 unfolds, both Meituan and Douyin have independently opted to adjust their organizational structures, signaling shifts in their future strategies.

The competition over the past year has inflicted some degree of damage on both sides. As Douyin’s pursuit of Meituan persisted throughout 2023, the gap in GTV between the two narrowed further. In Q4, the GTV of Douyin’s local lifestyle business exceeded RMB 100 billion (USD 13.8 billion) for the first time.

Meituan’s response has been to increase subsidies, with marketing expenses soaring to RMB 16.73 billion (USD 2.3 billion) in Q4 2023, marking a year-on-year increase of 55.3%. This surge far outstripped revenue growth, consequently impacting the operating profit margin of its core local business, which stood at 14.5% in Q4—a decline of 2% from 16.6% in the same quarter of 2022. The pandemic, which disrupted normal offline operations, played a significant role in this decline.

In an effort to track customers more closely, Meituan abandoned the agent-based model in lower-tier cities in Q4 last year and transitioned to prioritize direct sales. While this adjustment allows for quicker responses to intense competition and better service provision, it has also led to a short-term increase in costs. The operating profit margin of its in-store business for the wine and travel category fell below 30% in the fourth quarter, compared to its peak of 40%.

To withstand Douyin’s relentless pursuit, Meituan invested heavily in Q4 2023, achieving GTV growth for the wine and travel category by 160%. However, in Q1 this year, Meituan initiated a review of the return on investment of its tactics, emphasizing the rational allocation of resources.

One notable change is the adjusted priority of its live streaming project, which was previously highly valued. Users in multiple cities have reported that the live streaming feature has become less prominent on Meituan’s app, accessible only through the Waimai or Shangou pages. Merchants have reported similar observations, according to 36Kr.

“This change is a result of Wang Puzhong’s oversight of in-store and at-home operations,” a Meituan insider told 36Kr. Compared to revenue and GTV growth, Wang is said to be more pragmatic, paying more attention to changes in GTV and profit margin.

The platform product department established by Meituan in March is primarily responsible for integrating at-home and in-store products, offering merchants a comprehensive set of marketing tools ranging from digital shelf management and group buying coupons to takeaway and channel distribution.

In addition to product development, the integration of Meituan’s business development functions for both its at-home and in-store business units has commenced. It is understood that, for top customers of Meituan’s takeaway business, business discussions have already begun to take place in some cities. A business development representative from Meituan told 36Kr that the main goal for 2024 is to increase the penetration rate of in-store merchants.

By 2023, the number of in-store merchants listed on Meituan’s directory exceeded 30 million, yet only over 6 million of them collaborated with Meituan, accounting for less than 20%. “The internal goal is to achieve an average penetration rate of 30%, while striving to exceed 50% for the categories of aesthetic medicine, wedding supplies, and parenting products.”

Douyin is also undergoing changes. Although its pursuit of Meituan in terms of GTV was rapid in 2023, 36Kr reported that the company is dissatisfied with solely pursuing scale. The consequence of this approach was the stagnation of utilization rate and a worsening loss ratio. Meituan insiders disclosed to 36Kr that the gross profit margin of Douyin’s local lifestyle business continued to decline over the span of 2023, “starting positively in the first quarter before approaching a 10% dip by the fourth quarter.”

After experiencing nearly two years of rapid growth, Douyin has decided to slow down its pursuit of scale. Internally, it is contemplating revising down the RMB 580 billion (USD 80 billion) GTV target for 2024, prioritizing commercialization instead. This shift is evident in the recent organizational overhaul of its local lifestyle division.

Entering the first quarter of 2024, both sides have notably toned down their subsidy strategies, entering a relatively “peaceful coexistence” state. Meituan is aiming to maintain a long-term sales ratio of 2:1 over Douyin and has internally assessed that “the toughest times have passed.” Douyin’s perspective is that, after the recent endeavors, it intends to return to the original intention for entering this field: profitability.

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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