Huan-Po knows it’s about lunchtime when his colleagues start to circulate an online menu in their WeChat group at around 11 am. “We’ll have our lunch delivered and find a meeting room to dine together,” he says. Huan-Po is an MBA student at Peking University and interns at a startup in Beijing. He enjoys the convenience of food delivery so much that he even gets food brought to his student dorm.

“You’ll often see lots of deliverymen waiting outside of the dorm for the students to come down and pick up the food,” he says.

The O2O (online to offline) food delivery sector has been booming in China over the past year. Once an online order is placed through a mobile app, food from local restaurants can often be delivered within 30 minutes to an hour. The fast service at the press of a smartphone screen has encouraged more and more urbanites to use the various services.

The user base of online food delivery surged by 41.6% to 295 million users over the first half of 2017, said China Internet Network Information Center (CNNIC) in a report released in July. It’s worth noting that over 90% of the customers placed orders via a smartphone.

“As the industry matured and profitability becomes low, it is obvious for the platforms to explore horizontally in other relevant businesses,” said CNNIC in the report.

Another proxy battle between Tencent and Alibaba

Ele.me's deliveryman (Source: hexiu.2344.com)

Ele.me’s deliveryman (Source: hexiu.2344.com)

Just last month, China’s internet giant Baidu sold its food delivery service Baidu Waimai to rival Ele.me, backed by Alibaba. The acquisition is valued at around $500 million and was funded by a combination of cash and equity.

Baidu Waimai will continue to operate as an independent entity for a year and Ele.me can still use the brand name for 18 months, as part of the deal. Ele.me will also pay $300 million to leverage Baidu Maps, Baidu Search, and group-buying service Baidu Nuomi. Earlier this year, Ant Financial, Alibaba’s financial affiliate, invested $1 billion in Ele.me’s Series G financing.

The deal marked Baidu’s official walk-off from the food delivery arena, leaving Tencent-backed Meituan-Dianping and Alibaba-backed Ele.me the only two major players on the field.

After the merger, Ele.me is expected to draw in more orders and lead the food delivery market in China. Baidu Waimai, long branded itself as a delivery provider for high-end restaurants, can be a nice complement that fills up Ele.me’s market share on high-end food delivery.

Here’s what the market share is like in the first quarter of 2017. Ele.me secured 36.5% of the market share based on the volume of transactions, according to the Chinese market research firm BigData-research. Meituan-Dianping, however, closely followed its rival, taking up 33% of the market. Baidu Waimai came in third with a 17.3 percent share.

It’s a smart move for Alibaba to help Ele.me acquire Baidu Waimai to gear itself up for the battle against Meituan-Dianping, a complex rival given its large scale of offerings. From food delivery, group buying, booking hotels to purchasing movie tickets, Meituan-Dianping provides a wide range of services in the O2O sector that continue to challenge Alibaba.

Behind the merger, it’s even more important to underline the fact that Alibaba is making efforts to bring up its overall O2O businesses to full strength while facing off against Meituan-Dianping over its various services. Talk in the industry suggests the e-commerce giant is expected to leverage Ele.me together with Alibaba’s local lifestyle unit, Koubei, to compete against Meituan-Dianping. Also, Alibaba’s movie ticket app, Taopiaopiao (淘票票), is taking on Meituan-Dianping’s Maoyan, the largest player in the movie ticket selling sector in China.

The war in the O2O sector doesn’t just stop there. With the launch of Hema supermarket (盒马鲜生) a couple of months ago, Alibaba aims to provide a seamless blend of online and offline shopping experience as part of its New Retail strategy. Meituan-Dianping also opened a Zhangyu store (掌鱼生鲜) in Beijing, providing delivery service for fresh produce just like those Hema stores.

Meituan-Dianping's deliverymen (Source: quanmama.com)

Meituan-Dianping’s deliverymen (Source: quanmama.com)

Mobile payment businesses continue to thrive thanks to food delivery

The slipping of Baidu behind both Alibaba and Tencent in the takeout delivery sector once again demonstrates how vital mobile payments can be in China. Both Ele.me and Meituan-Dianping have direct ties to China’s major payment platforms—Alibaba’s Alipay and Tencent’s WeChat.

While food delivery services can be cash-burners by offering discounts to draw in new users, Alibaba and Tencent may as well see a significant increase in mobile payment transactions. Both tech giants are aiming to broaden their reach of payment services with the help of food delivery businesses.

According to analysis from the Wall Street Journal, it makes sense for Ele.me to acquire Baidu Waimai. Even if the purchase doesn’t do much to help the company increase market share, the tie-up will help Alibaba to drive more users to buy food with Alipay (paywall).

Are deliverymen safe on the road?

In the first half of 2017, Shanghai has seen 76 accidents on the road related to food delivery, local media reported. For those deliverymen, they face pressure from both the platforms and consumers, where they may get penalties if failing to deliver food within the given time. Also, due to the order-based compensation structure, deliverymen could possibly take in as much delivery requests as possible in a single ride, leading to even more time on the road.

To tackle overall safety concerns, the China Council for the Promotion of International Trade (CCPIT) drafted new rules earlier this month jointly with companies like Baidu Waimai to ensure a smoother and safer experience for consumers, local restaurants, platforms, and deliverymen. New rules include that the restaurants need to accept the orders within 10 minutes and that deliverymen should not enter consumers’ properties or receive tips.

In addition, Meituan-Dianping says they have prohibited the delivery companies from penalizing the deliverymen for delays and considered the delivery time only as one of the factors of the performance evaluation of the deliverymen.

Packaging waste: The ugly by-product of convenience

A Chinese environmental NGO this month sued the country’s three major food delivery platforms—Baidu Waimai, Ele.me, and Meituan—over their environmentally harmful practices. This is the first lawsuit against food delivery companies over pollution in China.

The NPO claims in an open letter that one delivery company can end up eliminating 6700 trees with its 13 million orders within one day, and alleges that the companies do not let consumers easily opt out of disposable utensils, which is in fact not directly outlined by Chinese laws.

In response to this, Meituan-Dianping announced to add a utensil opt-out button onto its app (in Chinese) to increase its green efforts.

The sprawling sector indeed brings convenience to consumers who have become more comfortable with cashless transactions. However, the relevant safety issues, as well as environmental harm, must be tackled as the food delivery apps expand.

“I use food delivery service almost six times a week now, mostly at work,” says Huan-Po. “It’s very convenient, though it should be more environmentally friendly.”