In 2015, Meituan-Dianping founder Wang Xing set an ambitious target of a $100 billion valuation by 2020.

As of early March of this year, Meituan’s valuation was $80 billion, $20 billion short of its original goal. As the Covid-19 pandemic has left much of the world reeling, it’s unlikely to hit the target this year.

This article first appeared in In Focus: Meituan, TechNode’s biweekly newsletter on the rising tech giant, on April 8.

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Last week, the food delivery giant released its Q4 earnings results, which came in strong—thanks largely to wider profits in its core food delivery segment. For the first time, the company had managed to turn both its operating profit and operating cash flow positive.

Meituan’s strong profits were largely driven by commission revenue from services including food delivery and travel booking platforms. However, this could mean trouble for Meituan as the revenues from these segments are and will continue to be under pressure for the rest of the year from the aftershocks of the virus outbreak.

Uncertainties loom

The coronavirus outbreak hit China’s food delivery, tourism, and dining industry hard. Despite a strong 2019 performance and an upswing in delivery demand during the lockdown, Meituan has warned of the adverse impacts that may last throughout 2020.

In its Q4 earnings report, the company indicated that its core business segments are all facing “significant challenges” on both the demand side and supply side, predicting that revenue growth will decline and operating losses will widen in the first quarter.

Meituan can no longer depend on commission fees for profits as it did in 2019. In the fourth quarter, commission fees accounted for around 65.2% of the total RMB 28.2 billion (around $4 billion) in revenue.

In 2019, Meituan’s commission revenues had increased 39.4% to RMB 65.5 billion from RMB 47 billion in 2018, mainly driven by growth from food delivery—which accounted for more than 75% of its commission revenue.

With the outbreak, however, the number of orders on its food delivery platform dropped. It will likely be months before the order rate recovers to pre-coronavirus levels.

Banking on commission revenue

After recording losses in 2018, mounting financial pressures to turn a profit had forced Meituan to increase revenue from commissions; squeezing revenue out of workers and merchants can maximize profitability in the short-term is faster than investing in R&D and new business expansion efforts. And when the company went public in late 2018, it created even more urgency to achieve profitability.

Read more: MEITUAN IN FOCUS | A matter of timing

Early last year, the company began intensifying its money-making efforts, which included lowering pay for its delivery fleet and raising its commission rate.

Meituan and other food-delivery platforms have been facing pressure from F&B associations and merchants to keep commission rates low. In February, regional food and beverage associations criticized Meituan for raising commission fees to more than 20% during the Covid-19 outbreak.

The company’s Q4 earnings report, however, indicated that it had waived commission fees for restaurants and other local services nationwide throughout the month of February as part of its relief initiative for businesses coping with the outbreak. The company also said it has returned a portion of commissions to participating merchants nationwide to be used for online promotion and marketing efforts.

Meituan said it plans to put more focus on other fast-growing areas including advertising and online marketing services, which accounted for 17.5% of total revenue or RMB 4.9 billion in Q4. Food delivery remains a low-margin business in which profitability is elusive—even for Meituan, which holds 60% of the Chinese market.

For 2019, commission revenue from food delivery service was RMB 49.6 billion, but food-delivery driver costs alone totaled RMB 41 billion. This means more than 80% of commission revenue went toward paying driver salaries.

In Q4, Meituan did manage to raise the profit margin for its food-delivery segment to 17.7%, up 13.4% from the same period in the previous year, but not without significant pushback from restaurants and drivers.

As its largest revenue component faces uncertainties, Meituan’s money-making unit—travel and hotel booking—has been among the hardest hit as a result of travel restrictions within the country and abroad.

Meituan’s in-store, travel, and hotel segment saw impressive growth last year, and contributed the most to Meituan’s overall gross profits. The segment grew by 25.6% year-on-year in 2019 to RMB 222.1 billion. Its profit margin was 88.8%, up from 86.8% in the previous year.

But it’s far too early to say that China’s travel industry has recovered.

Trip.com, Meituan’s travel booking rival, used its own Q4 earnings results to warn that its revenue in the first quarter could fall by as much as half.

Read more: Meituan faces challenge from Alipay on its home turf

The company’s efforts to push into other new business segments and R&D seem half-hearted, and are unlikely to cushion it from expected revenue losses in the upcoming months.

Last month, Meituan announced its decision to abandon its cloud business—an area seen as a top business priority for rival tech giants including Alibaba and Tencent. Meituan’s investment in R&D projects also dropped last year, with expenses declining to 8.7% from 10.8% in terms of percentage of revenues—the lowest since the company went public.

Despite recording strong growth in 2019, Meituan will face significant challenges as the economy slowly recovers—as well as from rising competition in the coming months, which may force it to rethink its profit strategy.

Although it’s difficult to gauge the impact of the pandemic on Meituan’s businesses, the lifestyle services landscape will almost certainly look different in 2020.

Nicole Jao

Nicole Jao is a reporter based in Beijing. She’s passionate about emerging trends, news, and stories of human interest within the world of technology. Connect with her on Twitter or via email: nicole.jao.iting@gmail.com.

Emma Lee

Emma Lee is Shanghai-based tech writer, covering startups and tech happenings in China and Asia in general. We are looking for stories related to tech and China. Reach her at lixin@technode.com.