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A Decade War in the O2O business: Meituan vs Ele.me

The war will continue between two O2O giants, Meituan VS. Ele.me

{{{ Jiaoyi (Joey) Huang & Dilan (Kristen) Yang}}}

Source: Sina Technology

A new round of competition has just begun. Similar to the fierce competition in the food delivery, victory will belong to the company that quickly adapts to the rapidly changing market landscape and adjusts its strategy accordingly. Undoubtedly, this competition will completely change the lifestyle of Chinese people through the companies’ entrepreneurship, market insights and technology innovation.

Winning Amongst Thousands of Competitors

Looking back at the competition that lasted for a decade between Meituan and Ele.me, two Chinese companies that mainly focus on food delivery, we can see that it has been a war about entrepreneurship, understanding customers and incorporating digital transformation trends.

Founded in 2008, Ele.me was the first to enter the takeaway delivery market in China. Xuhao Zhang, leading a team of students from Shanghai Jiaotong University, started to inaugurate Ele.me as a food delivery app for university residents and later expanded to non-student communities.

Two years later, Wang Xing, an established entrepreneur in the area of social network websites, sensed a business opportunity and founded Meituan. Meituan initially sold vouchers from merchants to small groups of buyers, with a similar business model to the US startup Groupon. It was not until 2013 that Meituan Food Delivery came into play. It was at a time when Meituan had won the so-called “War of Thousands of Group Buy Enterprises” and achieved a sales of 2 billion RMB in December 2013 alone. Thoughmany food delivery companies were inefficiently operated,they still had a robust customer base that frequently used the app. This reflected that there was a significant market demand unaddressed by the providers. In light of this, Meituan officially entered the O2O food delivery service market in 2013, focusing on Ele.me’s untargeted markets.

The competition picked up in 2014, when the food delivery turf war heated up with heavy discounting and large subsidies. At that point, the major players in the market were Ele.me, Meituan Takeaway and the rising Baidu Takeaway. Baidu Takeaway, backed by the large user base of Baidu, targeted the white-collar middle-to-upper-class market. In fear of these new entrants into the market led by the internet giants, Meituan took on an aggressive expansion strategy which resulted in a round of consolidation. In October 2015, Meituan merged with Dazhong Dianping - an equivalent to Yelp focusing on user review and recommendations of food - and became Meituan-Dianping. The newly merged Meituan-Dianping enjoyed optimistic views from the financial market and received 3.3 TN RMB investment led by Tencent as well as some other investors at the start of 2016. Soon enough, Zhang Tao from Dazhong Dianping was removed from the Co-CEO position to become the Company’s Chairman of Board, and with Meituan’s IPO in 2018, Meituan-Dianping was renamed Meituan.

The graph shows the deliverer of Ele-me, Meituan and Baidu Takeaway in front of a restaurant.

Source: Baidu

Keep Iterating and Fast Growing

On the other side of the food delivery business, a series of mistakes by Baidu Takeaway, causing it to lose ground to its competitors. For example, it did not seize the right moment of occupying the market during the Chinese New Year when transaction volumes surged in delivery markets. This ended with the merger between Baidu Takeaway and Ele.me in 2018, mirroring the earlier move by Meituan. In 2019, Ele.mei was then acquired by Alibaba.

Initially as a digital tool for ordering services that connect restaurants and eaters, Meituan and Ele.me also proactively explored various business model’s profitabilities, from group discounts at restaurants, to paid membership systems.

Finally, with bad performers quitting the market, the Chinese market on takeout delivery came to a duopoly landscape where Meituan, backed by Tencent, competes with Ele.me that is part of the Alibaba e-commerce ecology. With great traffic from Dazhong Dianping along with streamlined management, Meituan’s market share exceeded 65% compared to Ele.me’s just under 28%. According to the 2019 financial report released by Meituan in March this year, its revenue in 2019 reached 97.5 billion yuan, a year-to-year increase of around 50%. In 2019, Ele.me’s market share declined for four consecutive quarters.

This O2O business has been reshaping Chinese people’s life in all aspects. In 2019, 60% of those born in the 90’s and 00’s are targets of takeaway delivery. The transaction volume of the food delivery industry has been estimated to have reached 603.5 billion yuan in 2019, and the penetration rate of China's O2O food delivery industry in 2019 exceeded 14%, according to a survey report released by Meituan.

New Retail, New Round of Competition

A glimpse into Meituan’s integrated service platform through a snapshot of the app’s front page.

Back in 2016, Jack Ma mentioned an important trend in the future - new retail, and predicted that this trend, along with new manufacturing, new finance, new technology and new energy, will profoundly reshape China, the world, and everyone in the future. His prediction has come true in the Chinese business environment, with new retail becoming an emerging battlefield for Meituan and Ele.me.

What is new retail? With new retail, companies utilize the O2O business model, big data and artificial intelligence to digitally transform traditional commerce. This includes production, circulation and sales, deeply integrated online services, offline experience, and logistics. The form of the retail industry will eventually be subverted through a data-driven mindset, new technology adoption and the upgrading of user experience.

Meituan is ambitious in grabbing bigger portions of the cake, and with the penetration rate of food delivery gradually reaching its ceiling, Meituan has found its next growth opportunity. Through the large customer base of Meituan and Dazhong Dianping, the company has proactively expanded its business scope from "delivering food" to "delivering all goods”.

Looking back on Meituan’s expansion, this strategic shift is clearly visible. Starting from group discount and take-away, it has gradually developed a well-rounded service offering bundle including food consumption (take-away and restaurant ranking), hotel and travel booking and transport (bike sharing and taxi booking). The co-founder Wang Xing justifies this all-rounded strategy by comparing Meituan to Amazon. While Amazon achieved economies of scale by becoming an online platform that provides all kinds of goods to its customers, Meituan achieves economies of scale by becoming a platform that provides all kinds of services to its customers. The platform provides the access of entry to services related to all aspects of the customers’ lives, encouraging the customers to access the platform at high frequency.

In the fresh fruit and vegetable retail business, Meituan has demonstrated its amazing operational advantages accumulated in the food delivery industry. As this year’s unexpected epidemic has accelerated the maturity of this market, the transaction volume is expected to reach 5.6 trillion yuan in 2023, compared to a valuation of 4.9 trillion yuan in 2019. Experts predict that the market may be one of the most crowded and competitive tracks in China during 2020-2021. In first-tier cities, Meituan Maicai, the equivalent of "Meituan Takeaway" in raw food ordering, has entered into people’s daily life. This has been realized by the establishment of multiple small and medium-sized warehouses and distribution centers within local communities. After the consumer places an order, the goods are shipped from a local distribution center, rather than from a far-away warehouse in the suburbs, enabling Maicai to fulfill a “30-minute delivery”, as customers are generally within 3 kilometers of the centers.

In second and third tier cities, Meituan launched a community-based group purchasing business - Meituan Youxuan. It clearly sees that the fruit and vegetable retail business is in full swing, especially since markets have been educated to accept this model of online purchase of vegetables, fruits and other daily necessities during the covid-19 lockdown period. Aiming at the sinking market, Youxuan adopts the “pre-purchase plus self-pickup” model to empower community convenience stores and select cost-effective daily consumption goods. Because the user needs to pick up the goods the next day after placing an online order, this will greatly reduce storage and distribution costs.

Meituan’s ambition is not only to participate in sales and distribution, but also to directly provide digital services for businesses. By participating in traditional business transactions such as hotels, homestays, and raw food delivery, Meituan attempts to understand the business value chain, and provide businesses with digital solutions.

For Ele.me, it has urgently sought to prevent Meituan from invading this market. This July, Ele.me launched a round of product upgrades, declaring war on Meituan’s other digitalised local services. The Alibaba Group behind Ele.me has also increased the marketing of Ele.me’s food delivery, movie ticket sales, hotel booking and other businesses on Alipay, hoping to reduce customer acquisition costs for Ele.me and increase the number of users. Besides this, Alipay is also becoming the underlying technology infrastructure for Ele.me, as Hu Xiaoming, Ant Financial’s CEO, said that Alipay will become an open platform for digital life, focusing on the digitization of people’s purchasing and booking life. Alibaba is also trying to integrate food and beverage delivery, online supermarket - Tmall, new retail supermarket, as well as its Map Application Gaode, so that the supply chain and logistics capabilities can be fully utilized by all its teams. Ele.me is at the core of this strategy. In addition, Ele.me has also focused on the UGC ecology promoting the user interaction in the Application, including live streaming and short video channels. In the video recommendation page, users can be directly led to restaurants’ pages, which can increase purchasing conversion rate. In terms of the content, it also advertises makeup, supermarket retail and others.

Who Will be the Winner?

New retail and distribution have huge potential and are undoubtedly a huge blue ocean market. Additionally, unlike the saturated food delivery market, China's online retail penetration rate is still very low. Can Ele.me, who has fallen behind the food delivery, win the war?

Meituan seems to have an advantage in terms of team integration. Both Meituan and Dazhong Dianping have accumulated ten years of experience in the O2O business. After two years of team challenges after the merger, Meituan’s team structure and business operation collaboration have become relatively stable. On the other hand, the organizational and management capabilities of Alibaba, backing Ele.me, have begun to be questioned due to its inability to prevent Pinduoduo from breaking through its monopoly on high-end products in e-commerce. After Alibaba acquired Ele.me, the long-term integration process was not smooth - it was said that the two technical development teams had once even used different development languages. This is also the reason why Alibaba has accelerated the integration of Ele.me into its platform, hoping to better integrate infrastructure and data platforms. Overall, the new retail business, which heavily relies on city-based operations and management, is not Alibaba’s traditional strength. The new talents Ele.me has introduced through mergers and acquisitions as well as headhunting need time to be integrated into Alibaba’s twenty-year-old corporate culture and establish mutual trust with older senior executives.

In the new retail business, improving distribution can create a competitive advantage. This not only requires a reduction of delivery costs, but also a shortening of delivery time to improve user experience. One important asset is the rider. In June 2020, Meituan announced the number of riders on its platform has exceeded 5 million, while there are 3 million riders in Ele.me, according to data revealed in April, which indicates a gap of about 2 million. In first-tier cities, the delivery fee for each order is about 5-8 yuan (around 1$), accounting for a large share of the cost in a transaction. Therefore, Meituan and Ele.me are constantly improving order distribution efficiency and reducing distribution costs. In addition to optimizing the allocation algorithm and incentive mechanism, they have also outsourced the riders’ collaboration with third-parties to increase the flexibility of employment. The poor living conditions of riders have begun to receive widespread attention from Chinese society. An article in September called "Delivery Riders, Stuck in the System" criticized that driven by algorithms and big data, riders have to violate the traffic rules and even race against death to deliver on time and gain the full delivery payment.

Similar to the food delivery business, the capability to penetrate into new cities is highly significant. In the past, in order to seize the market, Ele.me and Meituan both subsidized billions of yuan to compete for a market share, but this in itself does not lead to a competitive advantage. Indeed, it should come from the scale effect. The excellent city-based operations means that the company can serve more people in the same city, promote transactions, and form economies of scale. The winner is the one that makes the right decision on where to launch new business and how many cities to enter. Plus, the selected cities should be able to have enough users and large consumption. This often requires an excellent sales team (often important in the early stage) and supply chain management team that are able to constantly adjust their strategies and seize the opportunities.

A new round of competition has just kicked off. Just like the competition between Meituan and Ele.me in the food delivery business, victory will belong to the one that quickly adapts to the rapidly changing market landscape and optimizes its strategy accordingly. Undoubtedly, such a competition will completely change both the purchasing and the lifestyle of Chinese people through innovation, revolution and market insights.

All opinions expressed in this essay represent our personal views only.

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