Fending off the fierce attack from Douyin, but the tough days for MEITUAN-W are far from over | Insights from JZ Research

On November 28th, MEITUAN-W released its third-quarter performance for 2023.

According to the earnings report, MEITUAN-W achieved a revenue of 76.47 billion yuan in this quarter, compared to 62.62 billion yuan in the same period last year, representing a year-on-year growth of 22.1%, surpassing market expectations of 76.009 billion yuan.

The net profit was 3.59 billion yuan, a year-on-year increase of 195.3%, surpassing the estimated 2.92 billion yuan, but a decrease of 23.4% compared to the previous quarter. The adjusted EBITDA was 6.19 billion yuan, a year-on-year increase of 28.9%, falling short of the estimated 7.13 billion yuan.

The adjusted net profit was 5.727 billion yuan, a year-on-year increase of 62.4%. The adjusted net profit margin was 7.5%, surpassing the expected 7%.

This earnings report is like a bombshell in the market. Some believe that MEITUAN-W has maintained its foundation under the fierce competition from ByteDance over the past few quarters, and has continued to achieve steady growth. Both overall revenue and profit have exceeded market expectations, which is not easy.

Others believe that compared to PDD, which released its earnings report on the same day, MEITUAN-W has been "downgraded" and has limited room for business growth.

Even more challenging is the continuous pressure on profits from the core local business in the long-term competition with ByteDance. It faces challenges from both internal and external factors.

Zhitong App has conducted a detailed analysis on the three most concerning questions in the market:

1. As a platform-based giant retailer, is MEITUAN-W's business performance closely related to the economic fundamentals and the purchasing power of the general public? Will a weak macro environment affect the growth rate of its core food delivery business?

2. To what extent has ByteDance's fierce competition negatively impacted MEITUAN-W? How long will this impact continue?

3. When will the new community group-buying business start to reduce losses?

Core Local Business: Food Delivery and Flash Purchase have no competitors

Looking at different business segments, the revenue of the core local business (including food delivery, flash purchase, in-store dining, homestay, and transportation ticketing) increased by 24.5% year-on-year to 57.7 billion yuan. The operating profit increased by 8.3% year-on-year to 10.1 billion yuan, with an operating profit margin of 17.5%.

Specifically, the food delivery business remains the core competitive strength of MEITUAN-W, with a solid foundation. In the third quarter, the number of on-demand delivery transactions increased by 23% year-on-year, with a peak daily order volume of 78 million, reaching a historical high that is twice as high as three years ago.

However, the average order value has declined, resulting in revenue growth slightly slower than the growth in order volume. This is mainly due to increased subsidies and the increased proportion of low-priced food delivery orders.Despite the stable performance of the food delivery business, the market is still concerned about whether the weak macro environment will affect the growth rate of the food delivery business in the medium and long term. It is also a question whether the daily average order volume can be maintained at the current level after various subsidies and discounts are cancelled.

According to Zhi Research, as a platform-based giant retailer, MEITUAN-W's business performance is naturally highly linked to the fundamentals of the economy, consumer purchasing power, and willingness. In a weak environment, price-sensitive users may reduce their demand for food delivery or switch to lower-priced products, further increasing their reliance on subsidies.

MEITUAN-W's expansion of low-priced food delivery product "Pin Hao Fan" at this time is not only a response to the decrease in delivery costs, but also reflects the trend of declining consumer environment.

If the macro environment continues to be sluggish, MEITUAN-W may have to continue sacrificing some profits to maintain the growth of order volume.

Based on MEITUAN-W's advantages in rider resources and delivery efficiency, the flash purchase business continues to achieve high-speed growth, with a peak daily order volume exceeding 13 million in August and a year-on-year increase of 30% in the number of active merchants.

Currently, the daily average order volume of flash purchase has exceeded 10% of food delivery, and the GTV (gross transaction value) has exceeded 20% of food delivery, with quarterly revenue approaching 5 billion RMB.

However, the flash purchase business is currently in a slightly loss-making state, mainly due to investment in brand marketing and subsidies to users, but the monetization rate of advertising is better than that of food delivery, with strong profit potential.

Local Life vs. ByteDance: Inflicting Damage on the Enemy at the Cost of Self

Food delivery is essentially a labor-intensive "hard work", and MEITUAN-W's investment and optimization of operational efficiency in this field have established an unshakable market position. ByteDance's multiple attempts in the food delivery field have not posed a threat to MEITUAN-W.

However, it cannot be ignored that ByteDance's local life business has been impacting MEITUAN-W for several quarters.

ByteDance's local life business started in 2019 and initially developed relatively slowly. But since 2021, ByteDance has increased its investment and deepened merchant operations, rapidly increasing its market share through traffic release and influencer marketing, especially by offering low-priced group-buying packages in the late stage of the pandemic.

Starting from the third quarter of 2022, ByteDance's local life business began to explode, and by the Spring Festival of 2023, its share of MEITUAN-W's GTV reached about 40%.

Facing ByteDance's fierce attack, since the second quarter of this year, MEITUAN-W has started a comprehensive counterattack, including reducing annual fees, renegotiating commission rates with merchants, and implementing measures such as package cutting (preventing merchants from listing all their tickets on ByteDance) to weaken the demand for "price for volume" from merchants. As a result, ByteDance's proportion of MEITUAN-W's GTV has started to decline.Although there was a rebound in the third quarter, it did not reach the peak level of the first quarter.

Another positive indicator worth noting is the growth in revenue from online marketing services, which directly relates to the core impact of ByteDance's local life business on MEITUAN-W.

In the past four quarters, the growth rate of online marketing service revenue has lagged behind commission revenue by 13.9, 18.4, 21.8, and 7.1 percentage points, respectively. This quarter, the growth rate of marketing service revenue surpassed commission revenue by 1.1 percentage points, which largely proves the effectiveness of MEITUAN-W's counterattack.

However, this counterattack also comes with a sacrifice in profits.

According to the financial report, the local business profit margin in the third quarter was 17.8%, a decrease of 4 percentage points from the previous quarter. The decrease in local business profit margin is partially offset by the growth in operating profit of dine-in, hotel, and tourism businesses, which offsets the growth in operating profit of food delivery.

MEITUAN-W has taken appropriate measures to respond to the competition this year and has seen some results. However, considering ByteDance's strong position in the local life business and the recent management adjustment - replacing the former head of local life, Zhu Shiyu, with Pu Yanzi as the head of commercialization - it is highly likely that ByteDance will mobilize resources from other traffic platforms under its umbrella, such as Xigua Video and Toutiao, to enhance its competitiveness against MEITUAN-W.

This also means that MEITUAN-W may need to continue sacrificing some profits to maintain its market position.

According to feedback from platform merchants, as the traffic dividend of ByteDance's local life business approaches its ceiling, it is expected that the GTV ratio of merchants on both MEITUAN-W and ByteDance platforms will stabilize.

Although ByteDance can enhance its competitiveness in the local life business by increasing traffic supply, as the traffic supply increases, the efficiency of traffic monetization will gradually decrease, resulting in reduced additional revenue and diminishing marginal effects. However, it is expected that this balance will take at least 1-2 years to achieve, and the impact on profit levels will be reflected in the financial statements with a delay.When will the new business stop losing money?

The new business (MEITUAN-W Optimal Selection, MEITUAN-W Grocery Shopping, Kuailu, shared bicycles, power banks, etc.) is the part with the greatest difference in market expectations and the company's management strategy.

Compared to MEITUAN-W's dominant position in service retail (i.e., core local business), the development of commodity retail (new business) is still weak. Especially when the service retail business enters a mature stage and faces a strong competitor like ByteDance, the improvement in commodity retail has not been achieved, leading to more and more dissatisfaction.

Specifically, in this quarter, MEITUAN-W's new business achieved revenue of 18.8 billion yuan, a year-on-year increase of 15.3%, and the operating loss narrowed by 24.5% to 5.1 billion yuan, with an improved loss rate of 27.2%.

Although the loss of the new business narrowed in this quarter and the UE model improved, it still significantly affects MEITUAN-W's overall profitability. The sources of these losses are still high fulfillment costs and high fresh food loss rates. How to achieve profitability in this emerging field is still being explored by major participants.

In other words, after burning money for so many years, the new business still cannot significantly increase its scale or improve its profits. Naturally, investors hope to "trim down" the new business, hoping that after removing the "burden," the company's profitability will improve.

However, the management believes that more time and investment are needed. In a conference call, they stated, "The data for Optimal Selection is growing, but the growth has slowed down slightly. We have identified the reasons for the slowdown and have developed a new, revised strategy to improve operations."

To boost confidence, MEITUAN-W CEO Wang Xing also announced the consideration of a $1 billion share buyback plan. He stated that the company's stock price in the secondary market only reflects the valuation of the takeaway business and does not reflect the company's intrinsic value.

Summary

In the rapidly changing field of the internet industry, even market-leading companies face continuous challenges and competition.

This industry characteristic means that the traditional concept of a "moat" is almost non-existent. In any profitable business area, there will always be new competitors emerging to challenge the existing market landscape.

MEITUAN-W, as the dominant player in service retail, also has to make choices between maintaining market share and pursuing profits, and it decisively chooses the former.

Facing the gradually exposed growth ceiling of its core local business and a formidable opponent like ByteDance, it is difficult to determine the winner in the short term. MEITUAN-W can only focus on expanding its business scale and continue to support the new business, especially MEITUAN-W Flash Purchase, MEITUAN-W Grocery Shopping, and MEITUAN-W Optimal Selection, which have profit potential. These areas are seen as key drivers of the company's future growth, which will inevitably affect its short-term profitability.

In other words, MEITUAN-W's tough days may continue for now.