China's Delivery Competition Ends, Forging Instant Retail Habits

China's meal delivery subsidy competition has concluded. Its lasting impact is a fundamental shift in consumer expectations. Customers now anticipate swift delivery of diverse items, including electronics, flowers, and medicine, within an hour. Instant retail marks the latest competitive arena in online shopping, according to Reuters.

Credit: Cloudinary

Over the past year, Meituan, Alibaba, and JD.com spent billions of USD on coupons, free delivery, and merchant incentives. This aimed at modifying shopping habits. Consumers in large cities now expect goods from groceries to cosmetics delivered within 60 minutes. The strategy converts frequent app visits from meal orders into sales of higher margin non food products.

And Shaohui Chen, Meituan Chief Financial Officer, stated on an earnings call that "Quick commerce has fundamentally reshaped consumer expectations around convenience and reliability. It is an irreversible lifestyle shift." Ministry of Commerce research forecasts the instant retail market will reach USD 178 billion by year end, expanding at an average annual rate of 12.6 per cent until 2030.

Beijing resident Jiang Yanxin ordered a "Niu Lai" doll while travelling. A courier delivered the item to her restaurant table promptly. Ms Yanxin noted her shopping behaviour: "When I think of something, I buy it and get it right away." Analyst Ed Sander noted large city consumers are accustomed to instant retail. Platforms focus on this market as it will "cannibalise traditional channels."

The market regulator intervened last year, summoning Meituan, JD.com, Alibaba, and others. It addressed competitive practices, calling for improved protection for consumers, merchants, and couriers. In April, 3.6 billion yuan in penalties were imposed due to meal delivery safety violations. Food industry analyst Zhu Danpeng stated competition ended after "tough government intervention," noting consumer benefits but damage to small restaurant operators.

But this intense competition affected profitability. Luckin Coffee reported a 5.3 per cent fall in same store sales at self operated outlets for April to June, contrasting with a 13.8 per cent rise a year earlier. This decline stemmed from a high comparison base from earlier meal delivery platform subsidies. Last year, Meituan recorded a loss, Alibaba experienced reduced profitability, and JD.com's profit almost evaporated.

Analyst Sander described the subsidy period as "totally ridiculous" and "definitely not sustainable." This expenditure altered the competitive landscape. No clear long term winner emerged. Goldman Sachs reported in April Meituan's meal delivery market share decreased from 75 per cent to 80 per cent before the price conflict. The meal delivery market now falls under instant retail. Analysys data for the second quarter shows Alibaba's Taobao Instant Commerce held 45.7 per cent, Meituan 45.3 per cent, and JD.com 7.7 per cent. This dynamic may change if platforms fail to retain users once subsidies are reduced.

So, second quarter earnings reports indicate platforms pivoted from user acquisition via meal delivery discounts towards profitability across wider instant retail. Alibaba's instant retail revenue increased 45 per cent year on year, reaching 53.3 billion yuan. JD.com reported significant narrowing of its segment loss, partly due to reduced meal delivery losses. Meituan, with the sector's largest merchant and rider network, returned to overall profit for the first time in nearly a year as subsidy spending lessened.

And Liu Xingliang, director of the Beijing based Data Centre of China Internet, noted the industry transitioned from user acquisition via subsidies to a second stage. This involves retaining users, expanding supply, and calculating order level economics. Companies now compete through logistical infrastructure. Meituan constructs supermarkets for groceries. Alibaba and JD.com develop "dark stores," retail outlets solely for online orders, and "lightning warehouses." These fast facilities are in densely populated urban areas to fulfil orders within an hour. Sander observed these companies "are really building something instead of just giving away a lot of marketing budget."

• Chinese consumer expectations have shifted towards instant delivery for various goods beyond meals.

• E-commerce platforms Meituan, Alibaba, and JD.com initially engaged in a costly subsidy war.

• Government intervention led to penalties and an end to aggressive competitive practices.

• The market has pivoted towards profitability in instant retail, focusing on higher margin non food items.

• Companies are now investing in logistical infrastructure such as dark stores and lightning warehouses for rapid fulfilment.

Source: Reuters