June 27, 2017 11:01 am JST
FT Confidential Research

On-demand delivery becomes a crucial battleground in China's internet wars

Potential of already-huge market drives billions in funding with profits elusive

JD.com logistic center in Hebei Province, China © Reuters

  • On-demand delivery is big business in China. With more than half of urban Chinese consumers ordering meals more than once a week, we estimate nearly Rmb1.4bn ($206m) in goods are being shuttled to Chinese homes and offices every day via delivery apps.
  • Market leaders are burning through cash, but this is one turf war in China's battle for internet market share that may be drawn out; they are fighting for a slice of a Rmb30tn consumer goods market.
  • Customers of Ele.me, which dominates in more affluent eastern areas, spend more on the service and use it more often. But our data show that many frequent users would cut back on use if the big discounts currently on offer were withdrawn.

On-demand delivery is big business in China. More than half of urban Chinese say they get deliveries to their home or office at least once a week while the government estimates that user numbers rose 83.7 per cent last year. We calculate that China's army of kuaidi drivers deliver nearly Rmb1.4bn in meals, snacks and other consumer goods every day via apps. While other turf wars in China's internet industry eventually burn out, we expect this one to last.

Our latest survey of urban consumers found 52.5 per cent ordering deliveries at least once a week, while 9.1 per cent said they used delivery apps almost every day (see chart).

First-tier city respondents used these apps far more frequently, reflecting the greater penetration of such services in major Chinese cities, while younger and more affluent respondents were more frequent and higher spending users. Respondents had spent an average Rmb229.1 on delivery services in the past month, rising to Rmb297 in first-tier cities.

And then there were two

The battle for China's on-demand delivery market has been whittled down to a fight between Meituan Waimai, in which Tencent Holdings is an investor, and Ele.me, which is backed by Alibaba Group Holding. Baidu Waimai, which is owned by the third leg of China's internet triumvirate, is a relative laggard - we expect the company to be sold soon as Baidu switches its focus to artificial intelligence, with logistics firm SF Express reportedly interested.

Meituan may be more popular, but our data show that Ele.me users are more engaged: among Ele.me users, 70.4 per cent said they used delivery apps at least once a week, versus 60 per cent of Meituan users, while Ele.me users spend Rmb283 on average each month against Rmb240 spent by Meituan users.

We believe this reflects Shanghai-based Ele.me's greater coverage in more affluent eastern and southern parts of China. Beijing-based Meituan is focused more on northern and western parts of the country. We estimate Meituan's market share at 37.2 per cent and that of Ele.me at 37 per cent, including Koubei, Alibaba's own on-demand delivery service.

The giants backing these firms are also throwing resources at them. Tencent incorporated Meituan Waimai into WeChat, its 900m-user strong social networking and mobile payment app, at the end of last year. Since then, Meituan's daily order numbers have surged to 11m from 7m last October. Koubei has been sharing orders with Ele.me, while Alibaba has been using its data resources to support Ele.me's operations, such as by calculating optimum delivery routes.

Other Chinese internet wars may have flamed out, but this one is set to continue. Alibaba is reportedly leading a $1bn investment round in Ele.me that would value the company at as much as $6bn. Since May 2014, Meituan has raised more than $6bn, while Ele.me has raised $2.3bn.

Burn baby burn

These companies need to raise money. Ele.me founder Zhang Xuhao has said the company loses Rmb1-2 per order, and it hit 9m orders a day at the end of last year. Wang Puzhong, general manager of Meituan's delivery business, has forecast that profitability is still two years away. The companies are forcing restaurants to hand over a greater share of sales and have introduced ranking fees, making restaurants pay more for better placement on the apps.

They are going after the restaurants because their hold on their customer bases is so precarious. Our data highlight the degree to which delivery firms retain customers through extensive discounts.

In our survey, 50.7 per cent of respondents said they would use these services only occasionally if discounts were not offered, while 41.1 per cent of high-frequency users said they would cut their usage if discounts were withdrawn.

Giant market up for grabs

Both Tencent and Alibaba will continue throwing money at this business because they see the future of delivery apps beyond a Rmb12 bowl of noodles. In fact, just 19.5 per cent of respondents said they use delivery apps exclusively for meals: for example, 38 per cent order fruit and 8.3 per cent cigarettes and alcohol.

Taking advantage of their armies of couriers and downtime outside of meal hours, the companies are expanding their offerings. Ele.me's new goal is to "make everything 30 minutes or less" and says goods other than food account for roughly 10 per cent of gross merchandise volume. On Valentine's Day this year, the company delivered a record 150,000 bunches of flowers.

Ele.me's Mr Zhang has estimated there is a Rmb30tn market in consumer goods to be delivered. Only 7 per cent of restaurant sales go through on-demand delivery apps, and that's the most mature segment. Clearly there is a lot of room for expansion. This is why Mr Zhang insists it is too soon to discuss the kind of consolidation that brought an end to earlier battles in the internet sector. Neither Alibaba nor Tencent are likely to back down for a while yet.

This article was first published on June 19 by FT Confidential Research.

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. A team of researchers in these key markets combine findings from proprietary surveys with on-the-ground research to provide predictive analysis for investors.

Asia300

Tencent Holdings Ltd.

China

Market(Ticker): HKG(700)
Sector:
Industry:
Technology Services
Internet Software/Services
Market cap(USD): 366,848.87M
Shares: 9,479.80M
Asia300

Alibaba Group Holding Ltd.

China

Market(Ticker): NYS(BABA)
Sector:
Industry:
Retail Trade
Internet Retail
Market cap(USD): 384,185M
Shares: 2,529.36M
Asia300

Baidu, Inc.

China

Market(Ticker): NAS(BIDU)
Sector:
Industry:
Technology Services
Internet Software/Services
Market cap(USD): 67,009.1M
Shares: 34.68M

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