GOING INTO MEAL DELIVERY TO SAVE E-COMMERCE?

Some industry insiders explain the battle as follows: those who win the meal delivery war can also win the instant retail war (due to higher merchant and driver density) and maintain a foothold in the e-commerce market. That’s supposed to be the explanation for JD entering the meal delivery business and Alibaba's Taobao and Eleme teaming up.

However, instant retail watcher Lao Zhang wonders if it’s really worth going into meal delivery for (like JD did this year).

First, meal delivery is a very difficult business. Meituan is the only major player making a net profit (approximately 3% or RMB 1.5 per order), mainly due to its 70% market share. Its meal delivery business seriously drags down its overall net profit to 10.6%. Alibaba’s Eleme (30% market share) has never made a profit.

Meituan often faces criticism for charging merchants 20%-30% commission, but this includes RMB 8 in delivery fees. Few merchants can afford not to join the meal delivery game now that the consumer has been ‘trained’ to want delivery, but 40% of new catering businesses can’t survive because of the fierce competition and oversupply in the sector. The number of catering businesses in China increased from 4.88 million in 2015 to 8 million in 2024.

Second, going into the meal delivery business is supposed to strengthen the efficiency of the marketplace model of instant retail (offline retailers sell through the internet platform, and the platform delivers). The platform can share drivers between meal delivery and delivery for its instant retail marketplace. This is how Meituan gained such a high market share in instant retail.

However, Lao Zhang believes the self-operated model of front-end warehouses (dark stores and ship-from-store by Dingdong Maici, Pupu, Sam’s Club, Hema) has a better consumer experience, efficiency and quality control, so it might be a model superior to the marketplace model (JD Miaosong, Taobao Shangou/Eleme, Meituan Shangou) that tries to get synergies from meal delivery.

Third, the instant retail market (~1 trillion RMB) is still small compared to the e-commerce market (~50 trillion RMB). Lao Zhang believes the logistics of instant retail (picking, packing, delivery, warehousing) are (still) more expensive than for e-commerce express delivery, especially since in China, a lot of e-commerce deliveries are done straight from factories. Instant retail has also not yet reached the variety of SKUs found in traditional e-commerce.

He concludes that instant retail will not replace e-commerce in the near future. Still, as warehouse automation and unmanned delivery lower costs in the medium term, it will start replacing traditional e-commerce.

- Ed