Higher rider costs for delivery drivers and new initiatives, such as building its grocery business, were factors that affected Meituan’s results
Higher rider costs for delivery drivers and new initiatives, such as building its grocery business, were factors that affected Meituan’s results © Bloomberg

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Food delivery giant Meituan is expanding its logistics network to take more groceries to consumers, as the pandemic-induced shift to online shopping pushes China’s big tech companies to rapidly build out their delivery operations.

This autumn, Alibaba spent $3.6bn to take over a top supermarket operator, while Pinduoduo is raising as much as $6.1bn in new financing as it refocuses on selling produce online.

Meituan said on Monday it would increase its warehouse network and logistics capabilities as it expands to more than 1,000 cities and counties before the end of the year.

“Grocery retail is an enormous market opportunity,” said Meituan chief executive Wang Xing. We aim to “deliver everything to customers’ homes”, he added.

Meituan has three different models aiming to get produce to consumers as quickly and cheaply as possible. In large cities, the company is building its own supply chain for drivers to ferry its goods to shoppers within 30 minutes. Its app also holds a marketplace where grocery stores can advertise their goods for delivery by Meituan riders.

Its newest venture, launched this summer, brings next-day shipping of cheap fruit to far-flung cities and towns.

“We are trying to figure out how to make it work. We are not a first mover in this market, actually I would say we’re one of the late movers,” said Mr Wang. “It’s not going to be a quick win.”

The spending to build warehouses, hire workers and build supply chains hurt the company’s bottom line in the third quarter. Adjusted for a fair value gain on its shares in a listed electric carmaker, Meituan’s net profit in the third quarter rose 6 per cent from a year earlier, but fell from the June quarter.

“All this investment will lead to significant expansion of the operating loss of our new initiative segment for the next few quarters,” said Mr Wang. The segment holds the grocery business.

“Everyone is going into grocery delivery but almost no one is earning profit,” said Lu Ming of Aequitas Research. “They are gathering users but there is no profit.”

Overall, Meituan reported strong sales growth of 29 per cent year-on-year to Rmb35.4bn ($5.4bn) in the third quarter, led by strong demand for food deliveries and ahead of analysts’ expectations.

“With Covid-19 well controlled and the economy firmly back on track in China, growth across all of our main businesses accelerated in the quarter on a sequential basis,” said Mr Wang.

Meituan’s stock is on a run, roughly tripling this year in Hong Kong, bringing its market value to about $220bn. However, its share price fell 7 per cent in Hong Kong ahead of its third-quarter results.

“Meituan’s shares are a bit overvalued — yes the company has been recovering but the stock price has risen too much in the past six months,” said Mr Lu.

At the height of the pandemic in China, the food delivery giant’s business dried up, as restaurants closed and consumers shied away from food some feared could be contaminated with coronavirus. Its travel booking business was also hit.

But with the virus largely under control in China, restaurants have reopened, helping sales at Meituan’s food delivery segment rise 33 per cent from a year earlier to Rmb20.7bn.

The results come as the commissions and advertising fees Meituan charges its 6.5m merchants have come under scrutiny, with Chinese regulators signalling they might finally crack down on practices that restaurants have criticised, such as forcing them to choose between listing on Meituan’s app or that of rival Ele.me from Alibaba.

“We are currently in constructive dialogues with the regulatory authority to better understand the consultation paper,” said Mr Wang. 

Meituan reported 476.5m users for the 12-month period ending September 30, up from 435.8m the previous year.

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