Antitrust comes for Meituan

Xiao Yu, the owner of a Nanjing sandwich restaurant has a bittersweet feeling about food delivery services, an industry that feeds or creates jobs for millions of Chinese. The longer he uses delivery platforms like Meituan and Eleme, the more bitter his sentiment becomes. 

Yu, who asked to be identified by his nickname, understood that cheap, quick food—sandwiches with chicken, pork, omelets, or salad—would rely mostly on delivery orders, at lower margins than dine-in. But even so, he was surprised how hard it’s been to make ends meet. “The number of food delivery orders is generally three or four times that of dine-in orders, but the profit margin is far lower,” he told TechNode.

As merchants’ dependence on food delivery increases along with the popularity of the service, it has become more and more difficult for vendors like Yu to make a living, despite the ever-increasing number of orders.

A commission fee of around 20% per order, plus logistics fees and other marketing expenses charged by food delivery giants eat up an increasingly large share of the merchant’s profits.

The delivery platforms are drawing complaints from the drivers too. The stressful working conditions endured by two-wheeled food delivery drivers drew public ire after a Beijing official exposed issues involving low wages and impossible delivery deadlines. Wang Lin, a deputy director at Beijing’s Bureau of Human Resources and Social Security, earned merely RMB 41 ($6) on a 12-hour undercover shift last month.

For the past few years, frustration with the platforms has been building among small merchants and delivery drivers, two integral parties involved in the booming industry that brings them relatively little benefits. 

With an announcement from China’s national watchdog last month, we learned that the biggest delivery platform of them all is finally being investigated for monopolistic practices. If the Alibaba investigation is any model, Meituan could end up paying a penalty of billions of dollars. The company’s stock closed Thursday at HK$ 273 ($35) when the Hong Kong market closed, down nearly 40% from its peak.

Meituan under antitrust probe

An offer you can refuse: One focus of the Meituan antitrust probe by China’s State Administration for Market Regulation (SAMR) will be the issue of “choose one of two,” also known as forced exclusivity. The term describes practices that attempt to get merchants like Yu to sign exclusively with one platform. 

The Meituan probe comes shortly after Alibaba was given a record RMB 18.2 billion fine for practices including forced exclusivity. Analysts are looking for parallels between the companies’ competitive practices.

In the case of food delivery, exclusivity is more incentivized than forced. Yu lists his restaurant on both Meituan and Ele.me, which has meant that each app deducted 20% of an order price as a commission fee, with a minimum of RMB 4.5. The commission rate would be 15% if he agreed to list on only a single platform. Representatives of both platforms call Yu and pay visits to his store “all the time,” he said, asking him to drop the other platform. However, with an average order size of RMB 16, he’d still be paying almost a quarter of each order owing to the minimum charge.

In an unscientific survey, TechNode staff checked 30 restaurants they had ordered from recently and found that 27 were listed on both apps. 

READ MORE: What is ‘forced exclusivity’? And why did it get Alibaba fined $2.8 billion?

Monopoly or duopoly? A key factor in any antitrust investigation is to determine who has a monopoly. Chinese law defines any company with more than 50% of a “relevant market” to be a dominant player, subject to more stringent oversight.

Meituan easily meets that definition. Its share of the delivery (in Chinese) market increased to 65.8% in the third quarter of 2019, up from 60.1% during the same period of 2018, according to a report by local research agency TrustData released in February. Over the same period, the share held by rival Ele.me declined from 29.3% to 27%.

As a non-dominant player, Ele.me is unlikely to be fined for forced exclusivity under the anti-monopoly law. However, the practice may also be forbidden under other laws, such as the e-commerce law and price law. We’ve also seen regulators get creative with market definitions to bring smaller companies under the law.

Penalty size: Meituan could face a penalty ranging from RMB 4 billion to RMB 12 billion, according to a report by investment bank Bank of Communication International. Alibaba was fined RMB 18.2 billion, or 4% of its domestic revenue in 2019, although the maximum fine allowable for antitrust violations is up to 10% of domestic revenues. Meituan reported revenue of RMB 114.8 billion in 2020. Bloomberg analysts predict that Meituan will get a smaller fine in keeping with its size. Four percent of the company’s 2020 revenue would be RMB 4.6 billion.

Share movement: Like Alibaba, Meituan’s shares rose slightly after the announcement of the probe, probably because it eliminated a major source of uncertainty for the company. Meituan shares had plunged more than 40% from record highs in February as China’s sweeping antitrust campaign gathered steam and investors anticipated losses from investment in new businesses.

The antitrust probe ultimately will have only a temporary impact on Meituan shares, although the fine could amount to billions of RMB, according to Mark Meng, an analyst from Tiger Brokers. “The goal for the investigation is to strengthen monitoring of the tech market and improve fair competition, rather than shake or dismantle a business,” he said.

Why forced exclusivity?

History of fines: Meituan has already been fined at a local level for forced exclusivity on multiple occasions.

• June 2017: Jinhua city’s market watchdog, in eastern China’s Zhejiang province,  issues RMB 526,000 fine to Meituan for unfair competition.
• February 2021: The Intermediate People’s Court of Jinhua, Zhejiang province, rules (in Chinese) that Meituan should pay Ele.me RMB 1 million for asking merchants to list exclusively on its platform.
• April 2021: Ele.me ordered to pay Meituan RMB 80,000 for unfair competition by a court in Wenzhou, Zhejiang province.
• April 2021: Intermediate People’s Court in Huai’an, Jiangsu province, orders Meituan to pay RMB 352,000 in compensation to Ele.me for forcing vendors to shut their outlets on its Alibaba-backed rival.

“I don’t think these platforms thought too much about regulatory scrutiny before,” a market analyst told TechNode, asking to stay anonymous because the matter is sensitive. “The fines were too small to worry about, and by the time the regulator does anything, you’ve already screwed over a key competitor,” the source said.

Compared with e-commerce, forced exclusivity matters more in food delivery, “as a narrow range of food options can lead users to abandon a particular app,” he said.

Spilled milk? There’s not much competition to protect in food delivery, with 93% of the market taken by Meituan and rival Ele.me, according to TrustData.

There’s little space for small, specialized platforms to find a niche in food delivery, which is a much smaller market compared with e-commerce. There are e-commerce platforms focusing on cross-border business, maternity, fashion, but it’s hard to imagine a food delivery platform that serves only one cuisine.

Michael Norris, research and strategy manager of Agency China, argued that the implications for consumer choice and platform competitiveness are higher for food delivery than e-commerce. “The impact is amplified when you exclusively sign up whole restaurant chains across the country.”

However, Norris says, “I do wonder whether the multiplicity of forced exclusivity fines at a local level will lead to a higher penalty level.”

“Fair competition in food delivery will benefit the consumers and incentivize enthusiasm in merchants. It will also prevent platforms from overdraft their management resources, credibility and values for the society,” said Zhang Yi, consulting CEO and chief analyst at iMedia Research.

Will anything change?

With little competition, an end to forced exclusivity won’t necessarily bring much relief to merchants like Yu. The two dominant platforms face little pressure to lower commissions for restaurants that have no choice but to rely on delivery.

Meituan made a change (in Chinese) to its commission system this month. Instead of a set percentage of order value, it now charges vendors according to distance, order price, and delivery time. Merchants also say there has been less pressure from both Meituan and Ele.me to sign exclusive deals.

“Meituan will separate these fees out. This also helps regulators understand how Meituan charges merchants, and the extent to which those respective fees are increasing,” said Norris.

Meituan CEO Wang Xing argued in the company’s Q4 2020 earnings call that these details will show that the company’s high take rate is “reasonable,” rejecting comparisons to the much lower portion of sales collected by e-commerce platforms like Taobao. “That’s an unfair comparison because we are providing merchants a market-based transaction service. Also, we are fulfilling the actual physical delivery,” Wang said.

Under the new system, the commission rate for Yu’s restaurant orders dropped slightly, but still represents a substantial portion of his sales. 

“We still haven’t seen changes that could bring material benefits to the industry or merchants. The only benefit is that agents of the platforms no longer bug us to sign an exclusive deal. It seems that merchants are the only ones who care about this,” Yu said.