China’s meal-delivery subsidy war may have ebbed but its biggest legacy could be a shift in consumer expectations, all manner of products can now be delivered within an hour of ordering.
Alibaba retails a wide range of lifestyle goods – Shutterstock
After a year in which Meituan, Alibaba, and JD.com spent billions of dollars on coupons, free delivery, and merchant incentives, so-called instant retail has emerged as the new battleground in online shopping. While companies’ spending frenzy moved billions of beverages to thrifty consumers, analysts said the bigger bet was on altering shopping habits, particularly in the largest cities where consumers increasingly expect goods as varied as groceries and cosmetics to arrive within 60 minutes.
Drink and meal delivery may bring frequent app visits, but the larger opportunity is to convert those visits into purchases of higher-margin non-food items. “Quick commerce has fundamentally reshaped consumer expectations around convenience and reliability. It is an irreversible lifestyle shift,” Meituan chief financial officer Shaohui Chen said on an earnings call.
The instant-retail market is set to be worth 1.2 trillion yuan ($178 billion) by year-end and grow at an average annual rate of 12.6% through 2030, Ministry of Commerce research showed. Beijing resident Jiang Yanxin recently ordered a “Niu Lai” doll based on a character featured in a viral animated film as she travelled to meet friends for lunch. By the time she reached her table, a courier had arrived at the restaurant with the item.
“I’m used to shopping this way now,” Jiang said. “When I think of something, I buy it and get it right away.”
Such big-city consumers have already grown accustomed to using instant retail services, said analyst Ed Sander at China Digital Retail Report. “This is why platforms are so enormously focused on winning the instant retail market, because it’s going to cannibalise traditional channels,” Sander said.
The market regulator summoned Meituan, JD.com, Alibaba, and others multiple times last year, calling out their competitive practices and urging better protection of consumers, merchants, and couriers. In April, it imposed 3.6 billion yuan in penalties on firms for meal delivery safety violations.
“That competition among the platforms has come to an end after tough government intervention,” said food industry analyst Zhu Danpeng. “The battle benefited consumers, but the damage to small restaurant operators is still there.”
For April-June, merchant Luckin Coffee, a major beneficiary of e-commerce platforms’ discounts, reported same-store sales at self-operated stores fell 5.3% versus a rise of 13.8% in the same period a year earlier. It said the decline primarily reflected a high comparison base created by elevated meal-delivery platform subsidies.
At the platforms themselves last year, Meituan swung to a loss, Alibaba recorded a decline in profitability, and JD.com’s profit almost evaporated. “It was totally ridiculous,” Sander said. “It was definitely not sustainable.”
The subsidy blitz reshaped the competitive landscape, though it is unclear who, if any, is the long-term winner. In April, Goldman Sachs said Meituan’s meal-delivery market share had dropped from the 75% to 80% held before the latest price war. The meal-delivery market has since fallen under the umbrella of instant retail, of which Meituan commanded 45.3% in the second quarter, data from Analysys showed.
Alibaba’s Taobao Instant Commerce was ahead with 45.7% while JD.com held 7.7%. That dynamic may change again if platforms fail to retain users once they reduce subsidies, analysts said.
Second-quarter earnings indicate the platforms have switched focus to turning user growth gained via meal-delivery discounts into profitability through broader instant retail. Instant-retail revenue at Alibaba jumped 45% year on year to 53.3 billion yuan.
JD.com said loss in the segment narrowed significantly, helped by loss reduction in meal delivery. Meituan, which has the largest merchant and rider network, swung to overall profit for the first time in almost a year as subsidy spending eased.
“The industry has moved from the first stage of winning users through subsidies to a second stage of retaining users, expanding supply, and calculating order-level economics,” said Liu Xingliang, director of the Beijing-based Data Centre of China Internet. The companies are fighting this second stage through logistics infrastructure rather than subsidies.
Meituan is building supermarkets to expand its grocery business, while Alibaba and JD.com are opening so-called dark stores– retail outlets for online-only orders– and super-fast “lightning warehouses” in densely populated neighbourhoods to fulfil orders within an hour, Sander said. “Now they are really building something instead of just giving away a lot of marketing budget.”
