Dinner at your door: inside China’s US$37 billion online food delivery services market

Demand is expected to grow as services extend to smaller cities and as the two companies that dominate the market offer new products and services to keep users loyal. But analysts say the duopoly means there isn’t much room for new entrants

PUBLISHED : Saturday, 16 September, 2017, 1:31pm
UPDATED : Saturday, 16 September, 2017, 1:30pm

Eileen Zhang is a big fan of food delivery services. The 30-year-old, who works for an international trading firm in the southern Chinese city of Shenzhen, just loves the convenience.

“I normally order lunch from them on weekdays so I don’t have to queue outside the restaurants, which are usually swamped with consumers during peak hours,” she said. “Sometimes I will also place orders during weekends when I am not in a mood to cook or go out to eat.”

Zhang is one of the 256 million people in China who used online food ordering services in 2016, a number that is expected to grow to 346 million by next year – still only about a quarter of the country’s population. The services already cover 1,300 cities and the market is estimated to be worth over 240 billion yuan (US$37 billion) next year.

Food delivery services are taking off rapidly in line with the surge in all things online in China, but unlike many other sectors such as e-retailing, the market has come to be dominated by just two players: Meituan Dianping, backed by internet giant Tencent, and Ele.me, whose main investor is Tencent’s rival Alibaba, also the owner of the South China Morning Post.

A third operator, Baidu Waimai, backed by the other member of China’s dominant internet triumvirate, Baidu, was sold to Ele.me last month after failing to make a profit and lagging far behind in market share. The failure highlights the tough competition in the market that is likely to mean the new duopoly will be in place for some time.

“The development of Chinese online food delivery market has proved that as long as a company has users and funds in China, it has opportunities in the market,” said Xue Yu, a senior analyst with research company IDC in Beijing.

“However, the costs for companies to acquire users are high so this will act as a brake on interest in the market by newcomers,” he said.

The services work through apps, which show lists of food providers near the user’s location and allow them to search for specific restaurants that may not be on the list. Clicking on the restaurant brings up the menu and the ordering system, which uses online payments or bank credit cards. The apps also show the location of the delivery driver, so an order can be tracked, and allow users to rate the food and service.

Their popularity is helped by the incentives they offer to users in the form of electronic discount coupons for future purchases, while both also have begun giving the option of becoming a member for a fee of 20 yuan a month. Membership benefits include more coupons and some free deliveries.

Chinese food delivery driver shows off his culinary skills

It is also good work for delivery staff. In big cities like Shanghai and Shenzhen, an order delivered on time normally earns the driver 7 yuan in commission, so a diligent driver completing 1,000 orders or more in a month could earn 10,000 yuan, adding in the basic salary paid by the companies, according to an industry insider. That is well above the average monthly salary in Shanghai of 6,504 yuan, according to 2016 figures from the city’s human resources and social security bureau.

Drivers in the southern city of Shenzhen even worked through a recent typhoon, with the companies providing them with protective clothing and insurance.

About 35 per cent of app users said they ordered food one to three times a week and another 35 per cent said they used them four to six times a week, according to a report by iiMedia Research, a Guangzhou-based research firm focusing on internet-related subjects.

Such growth potential had persuaded Baidu’s founder, Robin Li, in 2015 to pledge an investment of 20 billion yuan in the Baidu Waimai business over the following three years. Two years on however, Baidu sold the operation. It did not disclose the sale price, but media reports suggested it was around US$500 million, compared to Baidu’s own valuation of US$2.5 billion for Baidu Waimai in 2016.

Meituan, whose delivery service is known as Meituan Waimai, and Ele.me had 45.2 per cent and 36.2 per cent market shares respectively in terms of transaction values in the first six months this year, according to Chinese mobile data analysis firm Trustdata. Baidu Waimai had 6.3 per cent during the period. The remainder of the market was made up of smaller and independent local operators.

Trustdata figures also showed that 55.6 per cent of the companies offering services on Meituan were exclusive to that platform, compared with 18.6 per cent for Ele.me.

Food delivery platform Ele.me hopes to expand overseas

With two companies now controlling the market, analysts said their focus would move to expansion into smaller cities, which have a much bigger growth potential as they are less developed markets than big metropolises like Beijing and Shanghai, as well as expanding what they offer and targeting non-peak eating times with menus for afternoon tea or late-night snacks.

“Aside from food delivery from restaurants, cake and flower delivery, delivery from supermarkets and even medicine delivery are now options on both the platforms,” said Yang Xu, an analyst with Beijing-based internet consultancy Analysys.

“The two companies have to have an eye on non-peak hours to boost orders when their delivery staff are normally idle,” she added. “Fierce competition between the two is likely to continue.”

Meituan declined requests to comment for this article. Ele.me said in a statement that Baidu Waimai would maintain its existing brand, organisational structure and independent operation, and Ele.me would inject more funds, traffic and manpower into it to support its growth.

Neither of the two companies are profitable. In March, the vice-president of Meituan Dianping, Wang Puzhong, estimated that it would take another one or two years before the food delivery business would start making money, while in the same month Ele.me founder Zhang Xuhao said it was still too early to consider profit.

Even with the losses, however, analysts see little threat to the duopoly, given the enormous requirements for capital and labour resources. Foreign companies in particular, such as US-based UberEats, Germany’s Foodpanda or Britain’s Deliveroo, would find it very difficult to compete with Ele.me and Meituan, analysts said. All three operate in Hong Kong, along with another US firm, Delivery.com.

“Except for some small but niche food platforms, I don’t see any living space for another comprehensive player to compete with Ele.me and Meituan,” said Yang of Analysys.

For Shenzhen resident Eileen Zhang, that doesn’t matter so much.

“The two platforms are offering enough choices as they have covered most of the restaurants I can think of. But if there are new players coming to the market offering bigger discounts or promotions, I would certainly give them a try.”