MEITUAN-WR: The in-store business remains robust in the third quarter, while the growth of food delivery has slightly slowed down.

Below is the summary of the MEITUAN-W 2Q23 conference call. For a detailed financial report analysis, please refer to " Another Battle with Douyin, MEITUAN-W's Defense is Stronger than Alibaba "

I. Management Overview

1. Merchant Introduction and Management:

The number of newly onboarded merchants in the second quarter was more than double compared to the same period last year. We actively attracted high-quality merchants with top rankings in the review app, providing them with special resources and traffic support. We released a must-order list for food delivery in Beijing, Shanghai, Shenzhen, and Chengdu to attract more traffic to high-quality restaurants. At the same time, we provided high-quality delivery services to these restaurants. We lowered the subscription service threshold, strengthened content creation capabilities, expanded marketing activities, and provided new marketing tools and traffic acquisition channels for merchants.

2. Operational Strategy:

Marketing Methods: In addition to the existing store search business model, we have piloted short videos and live streaming, providing merchants with more diversified marketing methods. Through consumer data analysis, we help merchants design better meal packages and provide delivery services.

Integration of Digital Technology and Physical Economy: We have launched a new generation of drones and applied autonomous delivery vehicles in more scenarios. We have strengthened supply chain management and invested more subsidies in different scenarios.

We upgraded monthly promotional activities, allowing merchants to sell low-priced, high-quality dishes through limited-time purchases, live streaming, and video sales. This has helped merchants achieve significant growth in transaction volume and new customers.

We optimized the delivery route algorithm to improve the working experience of delivery workers by providing subsidies and reducing exposure to high temperatures.

Pharmaceuticals: We expanded the 24-hour intelligent pharmacy service, collaborated with pharmacies and pharmaceutical companies, and launched the "Yellow Light" program to bring medical resources into lower-tier markets.

II. Q&A Analyst Questions and Answers

Q: Regarding the growth trend, measures, progress, and effects of the offline hotel and tourism business in the second quarter?

A: We provided merchant incentives and marketing activities for core merchants, lowered the subscription service threshold, and simplified the onboarding process for small and medium-sized merchants to ensure supply diversity.

We provided multiple entry points for special offers in MEITUAN-W and Dianping, offering new marketing tools for participating merchants and directly increasing their traffic. For consumers, we met their demand for hoarding goods while consolidating their awareness of MEITUAN-W as the platform that provides the best discounts.

We increased the frequency of live streaming activities and collaborated with local governments to launch city-wide live streaming events, stimulating local consumption.

We also optimized the supply of hotel accommodation with dining, scenic tickets, and local tourism projects, and achieved synergies through cross-selling. This consolidated consumers' perception of MEITUAN-W as a platform for low-priced services and encouraged them to book hotels on our platform. Q: How do you expect local businesses to grow during the peak season of the third quarter? If there is increased competition in physical stores, hotels, and the tourism industry, will profit margins further decline below the second quarter's level?

A: We expect the growth of food delivery orders to slow down in the third quarter. Currently, we have observed some short-term unfavorable factors for the third quarter, including macroeconomic conditions and extreme weather.

On one hand, the recovery of offline traffic and tourism demand will stimulate offline consumption, temporarily squeezing the volume of food delivery transactions. It may take one or two quarters to return to normal as the balance and adjustment between offline and online demand occur. On the other hand, changes in the macro environment have led to changes in consumer purchasing power, which may affect the demand for food delivery to some extent. Extreme weather conditions, such as heavy rain in Beijing and Guangzhou this summer, have forced businesses to temporarily suspend operations and even halt food delivery services for safety reasons. We believe that the temporary slowdown in order volume is caused by general factors.

The businesses we collaborate with have jointly invested over 1 billion yuan in advertising and subsidies, with the goal of driving an additional 10 billion yuan in restaurant consumption. As for hotels and the tourism industry, the summer season is usually the peak season, and strong growth is expected in the third quarter. Through marketing and brand building, we have improved our ability to acquire traffic and retain users from both internal and external channels. We will dynamically evaluate market effectiveness and continue to prioritize user experience and merchant experience.

Similar to what we did in May and June, we will adjust our strategies based on results and market competition dynamics. Our current investment strategy may focus on enhancing brand awareness and recognition. Additionally, we aim to improve long-term stability and consolidate our competitive model. Compared to physical goods e-commerce, we believe there is still significant growth potential in online penetration for this industry.

Q: If changes in purchasing power have a negative impact on food delivery business, what measures can be taken to drive order volume growth? Will short-term pressure affect the growth of order volume in the medium and long term?

A: We believe that the negative impact of the macro environment is only temporary. Food delivery is an affordable way of consumption, with our average order value (AOV) ranging from 30 to 40 yuan. In the second quarter, the growth of high-frequency users and purchase frequency exceeded the average level once again. Meanwhile, more small and medium-sized businesses have resumed operations, and people from various industries have returned to work. Therefore, the supply and demand for low-end orders have quickly recovered. We adapt to changes in consumer purchasing power by introducing more high-quality, low-priced supply to meet market demand. We expect significant growth potential for orders below 15 yuan in the future.

We will continue to encourage consumers to store coupons through methods such as live streaming and stimulate non-immediate demand. In the long run, I believe the growth potential of food delivery remains unchanged. Small and medium-sized businesses have competitive advantages in terms of elasticity, and their recovery will allow us to penetrate deeper into the lower-priced supply sector. Due to continuous iterations in our delivery network, the cost of each delivery has been reduced, enabling us to better handle low- to mid-priced orders and effectively meet this demand. Therefore, we believe that regardless of the current macro environment, food delivery can become a more affordable alternative for cooking for more people.

Q: Will MEITUAN-W Flash Purchase be affected by changes in consumer purchasing power? How do you view the growth potential of MEITUAN-W Flash Purchase?

A: We have not seen significant impact from the macro environment on this business, mainly because many product categories are still benefiting from deeper online penetration, and the growth of MEITUAN-W Flash Purchase is significantly higher than the overall economic level. At the same time, we are exploring iterative new supply models to effectively complement traditional offline suppliers.

We believe that the order volume of MEITUAN-W Flash Purchase will achieve faster and more significant growth in the third quarter and in 2023, and it may continue to grow in the coming years, despite the high base from last year.

After more than five years of business development, the growth drivers of MEITUAN-W Flash Purchase are gradually shifting from "demand-driven" to "supply-driven".

In the second quarter, we saw that offline retailers are increasingly willing to invest more funds in our platform. MEITUAN-W Flash Purchase has exceeded the old order volume targets through systematic growth or investment applications. In the second quarter, nearly 60% of food delivery users have become users of MEITUAN-W Flash Purchase. There is still great room for online penetration in different categories of goods. In August, we further integrated with the food delivery membership program, and we expect to achieve more synergies in market promotion in the future.

Q: What is the positioning of autonomous delivery, drones, and autonomous delivery vehicles? What are the prospects and investment plans in this field?

If low-altitude logistics networks and autonomous delivery are applied on a larger scale, how will this optimize overall delivery efficiency and reduce delivery costs?

A: Drones (UAVs) and autonomous delivery vehicles represent MEITUAN-W's autonomous delivery capabilities and are good examples of synergy and integration between retail and technology. This is our corporate strategy, namely retail plus technology. As of the end of June this year, our autonomous delivery vehicles have delivered a cumulative total of 3.3 million orders. During the pandemic, our autonomous delivery vehicles were dispatched to Shanghai and other cities to help deliver daily necessities to residential communities, campuses, and hospital areas.

With the increase in delivery volume, we expect the per-order cost of autonomous delivery to decrease in the future. At the same time, we hope to combine autonomous delivery with couriers to establish an efficient mixed instant delivery network in cities. In the long run, autonomous delivery vehicles can not only improve delivery efficiency but also provide supplementary capacity during courier shortages.

Regarding drones, we have completed nearly 170,000 orders. In July of this year, we launched the fourth generation of drones in Shanghai. This new type of drone has made significant improvements in safety, economy, and environmental adaptability. It is more user-friendly and provides consumers with a better delivery experience. **We believe that drones can solve the problem of insufficient delivery capacity during peak periods, especially in densely populated urban areas. In addition, drones can be used for delivery in some scenarios where traditional delivery methods are difficult, such as tourist attractions, large theme parks, or nature theme parks.

In the future, we believe that autonomous delivery vehicles and drones will form a city delivery network together with couriers, combining air, rail, and ground transportation. We believe they can improve operational efficiency, address delivery capacity issues, and meet the needs of consumers in various scenarios. We have been investing in this field for six to seven years, but I think we are just getting started. Due to the existence of many technological challenges and policy issues, we ask for your patience.

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