In 2019, following years of astounding growth, China’s food delivery market was worth $86.2 billion. With their sights set on massive market potential, Chinese tech firms had scrambled to enter the sector in search of what was seen as a surefire road to profits. As always, they adhered to the prevailing model of running a business in China’s tech world—snapping up market share with marketing campaigns and massive user discounts, building the brand, and finally monetizing the business leveraging market dominance.
Meituan Dianping, which holds more than 60% of the Chinese food delivery market, has emerged as the winner of the cutthroat food delivery battle. However, when the food delivery giant moved to the final step—monetization—things did not go strictly according to plan.
Various parties involved in Meituan’s food-delivery ecosystem are increasingly pointing fingers at one another. Merchants accuse Meituan of imposing hefty commission fees, while the company claims it is running the business on low margins. Meituan’s delivery fleet has held labor strikes in reaction to lowered wages, and users have their own complaints about paying higher prices for food. It appears to be a game without a winner.
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Merchant pushback
In an open letter published on April 10, the Guangdong Restaurant Association (GRA) accused Meituan of exploiting merchants by charging excessive commission rates that “most of the restaurants can’t endure.” The complaints also pointed to unfair partnership clauses, which require merchants to sign exclusively with the platform.
The allegations further cooled the relationship between Meituan and its merchants, which were already tense following similar allegations from restaurant associations from Chongqing, as well as in Hebei, Yunnan, and Shandong provinces in February.
Discontent among small merchants was already brewing last year after the company announced a major rate hike in January 2019.
Meituan has a different story to tell, however. Wang Puzhong, a Meituan senior vice president responsible for the company’s food delivery business, argued that the company is not aiming for short-term profitability and operates on a very thin margin.
“After the launch of Meituan Waimai, we lost money for five consecutive years. Even in 2019, when we broke even for food-delivery services, the average profit per delivery order was less than RMB 0.2 (about 3 cents) in the fourth quarter, accounting for 2% of revenue,” Wang said.
Wang noted that the company has invested most of its income to help merchants develop professional delivery services, attract orders, and improve digital infrastructure.
Meituan’s share is too high—or is it?
GRA’s main criticism of Meituan is its high commission rate, which can be up to 26% for some new businesses, according to the association. It called on the company to lower its commissions rates by 5% or more.
Meanwhile, Meituan’s annual report showed that the average commission rate for its food-delivery business is 12.6%. In response to the GRA letter, the company said that more than 80% of businesses on its platform pay a commission of between 10% to 20%.
The discrepancy between the figures cited by the two parties is attributed to commission rate differences between merchants of different sizes. The average commission rate for small merchants is generally higher, as they lack bargaining power against the giant platform.
The platform’s low commission rates are usually enjoyed by restaurant chains, like McDonald’s. These are the brands that food-delivery platforms want to include anyway because of their brand value, and will do so for a lower commission.
GRA data shows that none of the 120 merchants in Haifeng County in Guangdong have commission rates lower than 20%.
Gross profit for most of the restaurants stands at around 50% to 60% of their total revenue, the operator of a chain restaurant told local media. The sources in the story said that most of the merchants they know are either breaking even or losing money after spending around 30% of revenue on Meituan for the commission fee and various marketing costs, and 20% to 30% for overhead costs like water and electricity bills.
Hit hard by the Covid-19 pandemic, the restaurants that are maintaining their business post-outbreak are more reliant on online orders than before, when they were able to balance online and more profitable offline orders. Thus, the cost of commission fees has become a bigger concern for those restaurants facing a business downturn as a result of the outbreak.
At the same time, many restaurants need more than one food-delivery platform to attract a sustainable number of sales, leading to more complaints about Meituan’s exclusivity agreements. The GRA said the company may be in violation of China’s anti-monopoly laws since it already accounts for 60% to 90% of Guangdong’s food delivery market.
The two parties reached a consensus, announcing a joint statement where Meituan pledged to return between 3% to 6% of commission fees to “good-quality merchants” as well as to remove the exclusivity requirement.
Both Meituan and GSA made concessions in the agreement. Instead of cutting commission rates as requested by the association, the commission-return pledge means that merchants still have to pay the original commission rate, and will receive the rebates in their Meituan accounts to spend on marketing campaigns and to buy traffic on the platform.
While not exactly the kind of cash the merchants were seeking, it will help merchants looking to boost the number of their online orders. However, the company doesn’t specify what makes a “good-quality merchant.”
The removal of the exclusive partnership policy is a significant move given the competition between Meituan and Ele.me.
Where did profits go?
While the coalition led by the GRA and Meituan has temporarily ended, the problem remains. If both merchants and Meituan say they are not making money from the business, then where have the profits gone?
Meituan’s Q4 report shows food-delivery fleet accounts for a large chunk of the company’s revenues. A total of RMB 41 billion, or more than 80% of commission revenue, went toward paying driver salaries.
However, delivery drivers have complained about pay cuts and some have held labor strikes to voice their grievances. The debate over delivery driver working conditions peaked when a Meituan driver stabbed a shopping assistant to death last October.
Meituan drivers fall into two different categories. Zhongbao delivery workers have no contractual obligation to the company, while delivery drivers contracted through labor-management intermediaries have regular working hours and orders.
Both of the groups have multilayered management teams over them, including the delivery station head, the team running the labor-management intermediaries, as well as a regional and a department manager within Meituan.
The multilayered management structure is partially determined by the nature of the food delivery business, which requires support to manage on-demand and point-to-point delivery. Other costs like extra packaging also add up.
Though food delivery is seen as a low-margin business, industry watchers think RMB 0.2 per order is too low a profit for Meituan. “It needs to better allocate its resources to increase efficiency and lower the costs if the figure is true,” a market watcher said to local media.