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China’s internet darlings seek growth after zero-Covid

Staff by Staff
December 11, 2022
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Two Chinese internet companies that have emerged as corporate winners through the pandemic are adapting to renewed competition as the country begins to shed its zero-Covid policy.

Food delivery group Meituan and bargain shopping app Pinduoduo raked in a combined Rmb11.8bn ($1.7bn) in profit during the three months to the end of September, as shoppers shifted to spending on food delivery and bulk purchases of staple consumer goods.

Meituan and Pinduoduo also increased sales by 28 per cent and 65 per cent year on year, respectively, beating the country’s tech giants. During the same period, Tencent’s revenues declined while Alibaba’s grew by just 3 per cent.

But as Beijing announced wide-ranging relaxations to President Xi Jinping’s contentious zero-Covid restrictions this week, both companies are seeking alternative revenue streams.

“These are the two highest quality companies in China’s internet land,” said Robin Zhu, an analyst at AB Bernstein. “They were both agile in the face of the Shanghai lockdown,” referring to the weeks-long shutdown of China’s biggest city in the spring. He noted that both platforms were quick to implement ways to ease deliveries to residents stuck at home, such as group buying services for residents in the same apartment block.

Meituan and Pinduoduo have also been a beneficiary of Beijing’s campaign to break up the stranglehold of ecommerce giant Alibaba, which forced some merchants to sign up exclusively for its popular Taobao and Tmall shopping platforms. In the three months to the end of September, Pinduoduo’s online marketing services revenue — which includes merchant advertising spending — grew to Rmb28.4bn, a 58 per cent increase from the previous year.

Meituan was able to raise prices as competitors retreated and spending on food delivery soared. “Meituan’s profitability has improved during the pandemic as people have been unable to travel or leave their homes,” said Li Chengdong, head of the Haitun ecommerce think-tank. “They’ve been spending more money on local services such as food delivery.”

“The pandemic has undermined competition in the market,” said one former Meituan employee, who left the company in a wave of job cuts in April. “As long as the company can deliver the food through the restrictions, it doesn’t need to have competitive prices or better products.”

Meituan’s pre-eminence may prove fleeting. Beijing’s regulatory clampdown on anti-competitive behaviour has opened the door for new players funded by rivals with deep pockets.

On Monday, Douyin, the Chinese version of social media app TikTok, announced a partnership with three companies to provide food delivery services, putting it in direct competition with Meituan.

Li said this move meant restaurants would probably shift some advertising spend from Meituan to Douyin.

Alibaba is also poised to fight for market share, having cut spending in recent months. “Alibaba dialled back its price war and incentive campaign to grow its food delivery business this year, which allowed Meituan to ease off on the subsidies,” said Zhu.

Even so, Meituan’s diverse stable of businesses means the company could still stand to benefit as China reopens. Zero-Covid controls have damaged the hotel and travel booking segment, its most profitable business before the pandemic.

Meituan and Pinduoduo are both trying to secure future revenue streams, the former through its travel and Yelp-like restaurant directory service and the latter through Temu, a Shein-like fast fashion app targeting western shoppers.

Analysts said Meituan and Pinduoduo were able to make decisive moves putting them ahead of the competition during lockdowns because the pair were still founder-led.

Meituan’s Wang Xing is still steering the company as chief executive, and while Pinduoduo’s Colin Huang has formally stepped down as CEO, he is still the largest shareholder and continues to play a central role in guiding the company’s direction, according to two people close to Pinduoduo.

Insiders said Meituan executed deep spending and personnel cuts which aided its profitability. In the results of an April investigation of the industry, the powerful Cyberspace Administration of China said tech employment remained stable, despite its battering regulatory campaign and depressed share prices.

But after presenting a rosy employment outlook to the regulator, “Meituan started laying people off”, said the former employee. “The cuts were made worse because the usual exodus of staff after Chinese new year bonuses are doled out didn’t occur.”

Pinduoduo and Meituan did not respond to requests for comment.

Despite Meituan’s growth and profitability, investors have been shaken by main shareholder Tencent’s move to divest its stake in the group, responding to pressure from Beijing to reduce the size of its internet empire in China, according to people familiar with the decision.

Meituan’s Hong Kong-listed share price has fallen more than 20 per cent in the past 12 months to HK$189 ($24), while Pinduoduo’s Nasdaq stock has risen nearly 50 per cent to $91.

Pinduoduo benefited as shoppers stuck at home turned to hunt for bargains on its hit app. But after reporting a bumper quarter of accelerating sales growth and increasing profits, early backer Neil Shen of Sequoia Capital China, considered the country’s top venture capitalist, decided to exit its board and cash out some of the fund’s gains.

Shen last month said he was stepping down “to focus on my other interests and engagements”. Entities affiliated with Sequoia filed to sell as much as $390mn worth of Pinduoduo shares on the same day.

The departure comes as Pinduoduo ventures into the territory of another Sequoia-backed venture, Shein, in September by launching fast-fashion venture Temu, targeting the insatiable appetite for cheap clothing among Gen Z consumers in the US. The group has lavished new shoppers with bargain deals and incentives for clothing manufacturers to sign up.

“Pinduoduo will have to invest a large amount to get into this field,” said Zhu. “But the potential upside is huge, especially as US consumers switch to cheaper retailers as the country heads into a weaker economy.”

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