HOW JD HYPES ITS TAKEAWAY BUSINESS AND HURTS COFFEE STORES

In February, JD launched a meal delivery business, which I wrote two reports on (techbuzzchina.substack.… & techbuzzchina.substack.…). Since the launch, JD has been constantly releasing stunning numbers that I found hard to believe. It claimed to have grown from 1 million daily orders, 40 days after the launch, to 25 million in June. Since JD is heavily subsidising consumers with discounts, I kept thinking, ‘sure, if you give it away for close to nothing, you will get millions of orders.’

But there’s more behind the figures …

Zouma Finance just released an interesting article that sheds light on the numbers. The most remarkable thing is that, despite JD’s enormous growth, the daily orders of market leader Meituan remain at 90 million and have not changed significantly. At the same time, Eleme + Taobao also claimed to have reached 40 million orders in May. Things don’t add up.

A closer inspection revealed that more than half of JD’s orders and approximately 25% of Eleme’s orders are now heavily discounted coffee and milk tea deliveries. Coffee is being delivered for as low as RMB 1.69 ($0.24!). Since only about 12% of Meituan’s orders are for coffee and milk tea deliveries, its daily orders have remained relatively unchanged.

This isn’t just unsustainable due to the subsidies; it has also proven incredibly damaging to the catering sector. JD specifically teamed up with Cotti Coffee, forcing Luckin Coffee to take action as well, and a new price war among coffee stores ensued. The Chongqing Coffee Industry Association recently urged JD to stop subsidising, as continued price wars could accelerate store closures and job losses among independent coffee stores.

Meanwhile, the market hasn’t shifted significantly as a result of JD’s campaign. It’s just pumping lots of cash into discounts while killing off smaller entrepreneurs. Market shares for Meituan, Eleme + Taobao, and JD are now estimated to be 70%, 20%, and 10%, respectively.  JPMorgan Chase predicts it will be 73%, 22% and 5% next year.

Competition in food delivery tends to grow the total market, which ultimately is mostly beneficial for Meituan. When, after a stable period of development, new competitors enter the market, they bring in a steady stream of new users. The industry leader is likely to achieve stronger profitability because, as scale expands, fulfilment costs decrease, and operating leverage and gross profit margin increase. Meituan grew by 8-10% in May, despite not engaging aggressively in the new competition.

Ultimately, Meituan, which has richer product diversity, more stable fulfilment, and more complete services, will most likely win. And when it is over, JD will have burned through a significant amount of cash on subsidies, coffee brands will have damaged their positioning, coffee franchisees will have faced high workloads with no additional income, and courier job opportunities will have collapsed.

- Ed