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New regulation in China to hit food delivery giants’ profit model

ByASNF

Feb 20, 2022

Between 2016 and 2020, the number of people who ordered food online in China doubled to 400 million. The boom was in part thanks to the generous subsidies shelled out by the country’s food delivery contenders for customers and businesses. As two companies, Meituan and Ele.me, came to dominate the market, they began to raise fees on merchants. But a new regulatory change is about to hobble their profit model.

On Friday, a group of Chinese authorities announced that food delivery platforms should further reduce the service fees charged to restaurants in order to lower the operating costs for food and beverage businesses. The news sent Meituan’s stock down more than 15% on Friday, erasing over $25 billion in market value. Alibaba, which operates Meituan’s archrival Ele.me, saw its shares slide about 4%.

The proposal came in a directive led by China’s National Development and Reform Commission, the country’s state planner, to “help struggling service industries recover.” The new rule will likely taper the profits of the internet behemoths in the long run. Commissions contributed as much as 60% to Meituan’s revenues in the three months ended September 2021. The firm also charges commissions from other types of merchants like hotels, though food delivery remains its largest revenue driver. Food delivery has been one of Alibaba’s main businesses following the firm’s acquisition of Ele.me in 2018, but e-commerce is still the giant’s main revenue engine.

China’s food delivery platforms have grappled with other changes that could erode their profitability. A viral article from 2020 brought to light the high-stress environment that put China’s millions of food delivery workers in danger. Efficiency-optimizing algorithms that don’t fully factor in human capacity and road incidents mean riders are often running the light to complete assignments.

Chinese authorities have ordered food delivery platforms to improve the safety of their workers. Meituan and Alibaba began giving riders connected helmets that come with voice command functions, so drivers won’t need to check their phones while dashing down the street on their scooters. The platforms have also relaxed delivery time limits for riders. The challenge for Meituan and Ele.me is how to balance workers’ well-being and business profitability.

Meituan is already working to reduce its reliance on manual labor. It recently showcased a fleet of food delivery drones that have been running small-scale trials in several Chinese cities. The flyer is in its early stage of product iteration and regulations for low-altitude drones are still taking shape in China. The economic viability of drone-enabled food delivery is also unproven. But automation is at least one way for labor-intensive, on-demand services providers like Meituan to test out a safer, more cost-saving future.

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