HONG KONG -- Meituan-Dianping is the undisputed leader in China's fast-growing food delivery market, but Alibaba Group Holding aims to knock it from its perch by outspending it.
Beijing-based Meituan -- which is backed by Tencent Holdings -- controls nearly two-thirds of the market for on-demand food delivery, and its revenue is double that of Alibaba-owned rival Ele.me. But the latter is spending aggressively on subsidies to gain users, locking Meituan in a "death-grip price war," according to analysts. Analysts downgraded the company's shares after it announced results for the October-December quarter earlier this month.
Virtually nonexistent five years ago, food delivery in China logged about 500 billion yuan ($74.4 billion) in transactions last year and the figure is expected to triple by 2023, according to investment bank Bernstein. The battle for this market is part of the larger war between Alibaba and Tencent, which have clashed in everything from e-wallets to advertising.
Ele.me, which was acquired by Alibaba for $9.5 billion last April, is a distant second in food delivery, controlling just 37% of the Chinese market against Meituan's 61%, based on Bernstein estimates.
But Ele.me has not been shy about its ambition of overtaking its rival. Wang Lei, CEO of the Shanghai-based company, said Ele.me is aiming for "half of China's food delivery market" and sets "no limit" on its budget to achieve that goal, local media outlet Caijing reported. Since Alibaba's acquisition of Ele.me, Wang and his team have already poured 3 billion yuan ($446 million) into subsidies in an effort to attract more users.
Brock Silvers, managing director at Shanghai-based investment firm Kaiyuan Capital, painted a bleak picture for the market leader following its recent earnings announcement.
"One of Meituan's two core businesses -- food delivery -- is locked in a seeming death-grip price war with Alibaba's Ele.me. Given Alibaba's massive financial resources, this practically guarantees that Meituan's food delivery business won't soon be profitable," Silvers said.
Meituan, which logged a net loss of 3.4 billion yuan during the October-December period, recorded slower growth in food delivery sales compared to the previous quarter. It also reported a decline in profit margin for food delivery at its earnings call.
"This all has raised market concern on heightened competition from Alibaba Group Holding's Ele.me," said Johannes Salim, an analyst with global investment research network Smart Karma.
Bernstein analysts downgraded Meituan's shares after the earnings announcement, citing the Alibaba-backed competitor as their chief concern. "Although Meituan's advantage with more merchants and users is intact, Alibaba's heightened intensity in competition this quarter is proving to slow Meituan down," they warned in a research note.
Bernstein also lowered Meituan's food delivery revenue growth forecast for 2019 from 44% to 39%. "Our view on food delivery growth and profitability is unchanged, but the path to get there is bumpier than expected."
Daiwa analysts were similarly downbeat. "To cope with the competition from Ele.me, Meituan is likely to sacrifice the upside on raising its commission fee from merchants and delivery fee from users," they said in a research note following the earnings announcement.
The Ele.me-Meituan battle underscores the deepening conflict between Alibaba and Tencent. Although China's two most valuable tech companies have risen to the top in different ways -- Alibaba made its fortune from e-commerce while Tencent rules the country's social media and entertainment world -- they have increasingly crossed paths in recent years.
Both companies have launched e-wallets, with Alibaba's Alipay controlling 54% of China's digital payments and Tencent's WeChat Pay coming in second with a 39% market share, according to Bernstein. They have also clashed over online advertising, where Alibaba claims a 36% market share based on revenue, compared to Tencent's 15%.
Meituan, however, says it can hold its own against Ele.me.
"We have been successfully maintaining our market leadership, while our subsidy rate is less than half that of our competitor," Chief Financial Officer Chen Shaohui said at the recent earnings call, without naming Ele.me. "We are very confident on our long-term competitiveness," Chen said.
Nevertheless, the intensifying competition has not only cast a shadow over Meituan's core food delivery business, it has also hampered its potential to cash in on new initiatives. While hotel booking, online advertising and many other services have helped boost Meituan's revenue, analysts say those services rely on food delivery to bring in users.
"We see a de-rating risk as user growth in food delivery could slow down on competition, which is likely limit the scale of its overall expansion," Dawai analysts said.
All this comes as Meituan has already lost its shine with investors. The company raised $4.2 billion when it went public last September, more than any other internet company in the world in the previous four years. But its shares have fallen by about one-quarter since then, and observers say competition from Ele.me will only make things worse.
"The company has yet to earn a profit and its losses are still growing," said Brock of Kaiyuan Capital.
But cutting back on subsidies is not an easy option. Price-conscious customers like Yan Yuejin, a frequent Meituan app user in Shanghai, can help explain why. The 35-year-old said he used to use Meituan's food delivery service to grab a quick meal at least four times a week, but now he is having second thoughts.
"I do prefer Meituan to Ele.me because it has everything ranging from food delivery to ticketing," Yan said. "But if Ele.me offers a better deal, I'd like to also give it a go."