Chinese food delivery giant Meituan bets on groceries

Grocery giant Meituan is expanding its logistics network to deliver more food to consumers as the pandemic-triggered shift to online shopping is forcing China’s big tech companies to rapidly expand their delivery operations.

This fall, Alibaba spent $ 3.6 billion to acquire a top supermarket operator, while Pinduoduo raised up to $ 6.1 billion in new funding as it re-focused on selling products online.

Meituan said Monday it will expand its warehouse network and logistics capabilities as it will expand to more than 1,000 cities and counties before the end of the year.

“Grocery retail is a huge market opportunity,” said Wang Xing, CEO of Meituan. We want to “deliver everything to the customer’s home,” he added.

Meituan has three different models to bring the products to consumers as quickly and cheaply as possible. In large cities, the company is setting up its own supply chain in which drivers can bring their goods to buyers within 30 minutes. The app also provides a marketplace where grocery stores can advertise their goods for delivery by Meituan drivers.

The newest company launched this summer is bringing cheap fruit to distant cities the next day.

“We’re trying to figure out how it works. We are not a first mover in this market, actually I would say that we are one of the late movers, ”said Wang. “It won’t be a quick win.”

Spending on building warehouses, hiring workers and building supply chains weighed on company results in the third quarter. Adjusted for a fair value gain on its stake in a publicly traded electric car maker, Meituan’s third-quarter net income rose 6 percent year over year, but declined from the June quarter.

“All of these investments will significantly expand the operating loss of our new Initiative segment over the next few quarters,” said Wang. The segment holds the grocery store.

“Everyone goes into grocery deliveries, but almost no one makes a profit,” said Lu Ming of Aequitas Research. “You collect users, but there is no profit.”

Overall, Meituan saw strong revenue growth of 29 percent year over year to Rmb 35.4 billion (USD 5.4 billion) in the third quarter, led by strong demand for grocery deliveries and above analysts’ expectations.

“With Covid-19 well controlled and the economy firmly back on track in China, growth in all of our main businesses accelerated sequentially over the quarter,” Wang said.

Meituan stock is on a run, roughly tripling in Hong Kong this year. The market value is around USD 220 billion. However, the Hong Kong share price fell 7 percent ahead of the third quarter earnings.

“Meituan’s shares are a little overvalued – yes, the company has rebounded, but the share price has risen too much in the past six months,” said Lu.

At the height of the pandemic in China, the food supply giant’s business dried up as restaurants closed and consumers shied away from food that was feared to be contaminated with coronavirus. The travel booking business was also affected.

With the virus largely under control in China, restaurants have reopened, which helped Meituan grocery delivery sales jump 33 percent year over year to Rmb 20.7 billion.

The results are due to scrutiny of the commissions and advertising fees that Meituan charges its 6.5 million merchants. Chinese regulators signaled that they could potentially take action against practices criticized by restaurants, such as choosing between listing in Meituan’s app or rival Ele.me from Alibaba.

“We are currently in a constructive dialogue with the regulator to better understand the consultation paper,” said Wang.

Meituan reported 476.5 million users for the twelve month period ended September 30, compared to 435.8 million in the previous year.

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