Lihua Fast Food Was Delivering in 30 Minutes for 3 Yuan Years Ago. Why Can't It Keep Up With the Delivery Boom?

This delivery company made one forward-looking move after another, and it still promises "3 yuan to deliver, 30 minutes to arrive." How did it lose young customers — and when the subsidies run out, can it come back?

Every day at lunchtime, a row of electric scooters from Ele.me, Meituan Delivery and Baidu Delivery lines the intersection below Jianwai SOHO in Beijing.

In the elevators, riders in blue, red and yellow uniforms, kangaroos on their backs, go up and down with insulated boxes, jogging the whole way.

The scene is common in office towers, schools and residential compounds across Beijing, and in Shanghai, Guangzhou and other cities too. 2016 is the third year of China's food-delivery O2O boom: the market has grown from 63.48 billion yuan in 2013 to a projected 180.87 billion yuan this year.

The market has also finished the familiar ritual of picking sides. BAT — Baidu, Alibaba and Tencent — have taken their positions in Baidu Delivery, Ele.me and Meituan Delivery, which together hold more than 85% of China's food-delivery market.

Food delivery has never been this lively. But before the platforms existed, China's leading delivery company was Lihua Fast Food, which started out in Changzhou, Jiangsu Province. It has been in business for 23 years.

Its biggest market is Beijing, at 30% of revenue, followed closely by Shanghai. Office workers born in the 1970s and 1980s in those two cities mostly know the name.

"In Beijing, Lihua is the only boxed-lunch brand I can name," says Amy (a pseudonym), born in 1987. She ate it often in high school — on weekends when she had cram school, or over the winter and summer holidays. Even now, when she can't decide what to eat, she sometimes orders one out of habit.

"One order minimum, delivered in half an hour." Even now, with delivery apps everywhere, no one else guarantees that.

The O2O boom brought Lihua a surge of business. In 2015, its Beijing operation jumped from 10,000 orders a day to 28,000, with 20,000 of those coming from the three main platforms — Ele.me, Meituan Delivery and Baidu Delivery. Beijing revenue last year was around 280 million yuan, up more than 15%.

But the competition came on harder still. By the first half of this year, daily orders had fallen back to 15,000, and profit was down 5 percentage points from a year earlier. Order volume is still above where it was before the platforms arrived, but the delivery market has swelled much faster — which means Lihua's share of it has been squeezed.

Worse: many people born in the 1990s, and the younger ones born after 2000, have never heard of Lihua Fast Food at all, and loyalty among old customers like Amy is slipping.

"Food-delivery O2O came too fast, and some companies lost their core strength once the platforms showed up," Zhang Chang, Lihua's marketing director in Beijing, tells QDaily.

That is Lihua's own problem, in fact.

Lihua Had Prepared for Everything — Some of It Years Too Early

Lihua was founded in Changzhou in 1993. Its founder, Jiang Jianping, had taken over the canteen of a retirement apartment complex there; while feeding the residents, he started a side business taking food orders by phone. After entering Beijing in 1997, the company gradually built its own supply chain and logistics, spread into more than a dozen cities, and became China's largest dedicated delivery company.

Much of what Lihua did looks early even today. It was the first to promise delivery in 30 minutes. Zhang Chang remembers that around 2000, Lihua still had few outlets in Beijing, so the delivery radius was long and complaints were frequent.

"We hired a consulting firm — consulting for fast food back then, and Chinese fast food especially, was rare. We ran 300 questionnaires, and more than 90% of customers picked 30 minutes as an acceptable wait, so we made 30 minutes the threshold we promised," Zhang Chang says.

Worth noting: KFC Home Delivery and McDonald's McDelivery, which later made the same 30-minute promise, did not appear until 2006 and 2007, and they charged more for it — usually 8 or 9 yuan, against Lihua's 2 or 3.

Lihua then used that 30-minute radius as the rule for picking outlet sites. An outlet — the company prefers to call it a branch — is where riders collect the food. That became one of Lihua's advantages: "Lihua runs one point to many points. The pickup spot is fixed, so there's no waiting. Delivery platforms run many stores to many points, so riders spend a long time on the trip back."

More important, of course, was how standardized the food was. Customers could only choose within a fixed set of combos, which meant a rider could carry more orders per trip than on other platforms. To get the same effect, Baidu Delivery and Ele.me generally bundle orders together.

Lihua took plenty of wrong turns of its own at first, trying to raise efficiency and cut delivery costs. "In our first few years in Beijing there weren't many orders. A rider would come back from a drop-off and find the company next door had ordered too, so a lot of trips were wasted. There were no pagers or mobile phones then, so we bought 20 walkie-talkies — expensive, 8,000 yuan each," Zhang Chang says. "That was our call center, more or less, and back then we often crossed frequencies with the police. When an order came in, we'd read it out to the rider over the radio."

In time they learned roughly how many orders each area produced a day, so a rider would take out five or ten meals and wander near the office towers, ready to be handed an order on the spot. "It's a lot like Didi car-hailing today — every rider is basically a 'mobile meal machine.'" That was the first version of Lihua's roving delivery.

Lihua now has 32 branches in Beijing, and therefore 32 kitchens. Before the lunch rush each day, its database works out how much of each dish every office building will want, based on past orders.

Customers can order by phone, on the website, through the mobile app, over WeChat, or on the delivery platforms. The orders pool automatically in a dispatch center, then go out to dispatchers at each branch, who look at where customers are and how riders should be routed and sequenced before sending addresses to riders' phones.

A roving rider usually reaches an assigned office-building area ahead of time with 50 to 60 meals, and waits. Once a customer orders, the system sends the address to that rider, who delivers it directly — cutting out the round trip between kitchen and customer. If the real orders don't match the forecast, or a customer wants something specific, a separate rider follows up with an extra run.

Lihua started stockpiling data early. In a Zhihu thread on how Lihua Fast Food achieves its delivery efficiency, one reply said the company had been collecting data for more than a decade, and that the size and accuracy of its database were beyond what an ordinary company could manage.

How Lihua built its information systems

1994

Shared customer records across multiple stores and regions over dial-up telephone networks

1996

Worked with pager operators to build a wireless paging platform suited to receiving business information

2000

Rolled out online ordering nationwide, computerizing everything from order to dispatch

2007

Applied GPS satellite positioning to food delivery (two years before Ele.me was founded)

If words like "internet thinking" and "big data" had existed a decade and a half ago, plenty of people would probably have used them on Lihua Fast Food.

Besides speed, Amy says the other reason she chose Lihua was that hardly any Chinese fast-food operator would deliver a single order back then. On that point alone, Lihua left many rivals far behind. Even today, most delivery orders require a 25-yuan minimum.

People Started Wanting More From Delivery, and Lihua Began to Look Dated

Carried by mobile internet and mobile payments, online food delivery really took off in 2014.

In January 2014, Dianping and Meituan both launched delivery channels. In April, Baidu bought Nuomi and launched a delivery service of its own. In May, Ele.me took an $80 million investment from Dianping and others. In September, Daojia Meishihui closed a $50 million Series D. In January 2015, Ele.me raised another $350 million…

When the German delivery brand Waimai Chaoren ("Delivery Superman") announced its exit from China this past March, Liu Kai, China chairman of its parent company Delivery Hero, wrote in an open letter: "China's three largest delivery platforms — Ele.me, Meituan Delivery and Baidu Delivery — are peers we admire, and they are now worth more than $9 billion between them, more than the world's three largest delivery platforms, Delivery Hero, GrubHub and Just Eat, combined. And that leaves out everyone else in the Chinese market."

Ordering delivery has become a daily habit. Five years ago you might have called McDonald's or Pizza Hut now and then, when you wanted something better than usual. Now it is so ordinary that the old shorthand for a miserable life — "eating instant noodles every day" — might as well be "ordering delivery every day."

Convenience, choice, easy payment and, above all, the blanket of promotions — "10 yuan off orders over 20," "15 yuan off your first order" — pushed the delivery market out fast.

Ele.me CEO Zhang Xuhao once said that in the future, having a kitchen at home may be a luxury, because people born after 2000 no longer cook.

But as delivery became routine, what people wanted from it moved closer to what they want from any meal: on top of being convenient and filling, the food had to taste good — and taste good differently every day.

That is Lihua's problem now. Of the customers it first served, "people born in the 1970s and 1980s didn't ask much of their food. The old standardized combos were enough. But people born in the 1990s have never gone hungry. They're fussy, and they want something that feels like theirs," Zhang Chang says. Lihua's packaging strikes them as dowdy, too.

Even customers born in the 1980s now find Lihua behind the times, and the force behind that is rising spending power. As Zhang Chang points out, back when the mom-and-pop shops on the street were selling boxed lunches for 8 or 10 yuan, Lihua was charging 15 or 20. "People used to joke that Lihua Fast Food was for rich people." Now Lihua is on the wrong side of the same joke.

"Thirty or 40 yuan for two dishes you actually want, or a 20-something-yuan boxed lunch — which would you pick?" Amy asked back during the interview.

More to the point, the advantage Lihua spent years building — one order minimum, 30 minutes to the door — counts for less and less, and the platforms' unending subsidies make Lihua look like ordinary value for money.

Lihua was, in fact, usually early to go online, or at least not late. It put up its own ordering site in 2000, and, to use today's language, the interaction and interface were friendly: information laid out plainly, no registration, just order. To get people ordering online instead of by phone, the company deliberately used discounts to steer them there. But it seems to have been slower to notice the mobile-internet boom of recent years. "My sense is that when mobile internet took off, Lihua was still mostly on PC, and as I remember it, the website barely changed for more than a decade," Amy says. It never launched an app, either, and until recently it wasn't on any delivery platform.

The second half of Zhang Chang's remark about delivery companies, Lihua included, losing their core strength was this: "We hope to adapt to the platforms and find a way to live alongside them." That probably explains the hesitation over mobile.

Lihua's Rivals Never Changed — But the Weapon It Beat Them With Is Now Theirs

In Guomao, the densest cluster of office towers in Beijing and once one of Lihua's busiest areas, a Lihua rider hurried in 40 minutes after the order was placed. He told QDaily that his Guomao branch had gone from three or four hundred orders a day last year to just over a hundred. Because of the drop, the company scrapped its roving riders last month.

In Lihua's best years, its real rivals were the small restaurants scattered along every street. Back then, small and mid-sized eateries had neither the money nor the ability to build an efficient delivery operation. Some sent a waiter out with the food, but at that scale it never added up to much.

Lihua's strength was supplying standardized food at scale. Delivery-only meant no rent in expensive commercial districts, and a scaled supply chain and operation meant more output at lower cost. It looked like a story of Lihua hitting small restaurants from a higher dimension.

Now Lihua is in the same bind.

In the end, its competitors today are still, in essence, those same scattered small restaurants — except that technology platforms like Ele.me have given them scale.

The shift is like an elephant facing a swarm of ants. The platforms have given every ant a pair of wings; the elephant has been given the same wings, and still can't fly as high.

It looks like a business cycle closing.

Lihua also finds it hard to scale next to the delivery platforms, though the comparison may not be fair. Over 23 years it reached more than a dozen cities, and every expansion meant more fixed costs and more people on the payroll. Ele.me reached more than 200 cities in a few years, and signing up another restaurant costs it almost nothing. That is a higher-dimension hit of another kind.

McDelivery is another useful case: it, too, built its own logistics and promised 30 minutes. A person familiar with McDelivery told QDaily that its order volume rose after it joined the delivery platforms, and because margins on delivery beat dine-in, it became a new source of growth for McDonald's. The difference from Lihua is that McDelivery sat on top of McDonald's existing network of stores, so the extra cost was small.

The platforms have handed nearly every restaurant in the country the ability to deliver. Every time one more street-corner shop appears in a platform's listings, Lihua has one more competitor. Which means its old rivals now stand at the same starting line it does.

The things Lihua once got right are the things those rivals are now working hardest to build.

Lihua Knows It Has a Problem, and Has Started to Change

To shake the impression that Lihua is desk-lunch food, the company recently added a "Round Box" line. Unlike its rectangular boxes and their more traditional design, this line comes in black packaging with a cleaner look.

The food changed from the old formula of two meat dishes and two vegetable dishes to one main dish with a side. The three new items are braised chicken over rice, red-braised lion's head meatballs and Sichuan-style beef over rice. For a company that sticks to standardization and has only about 20 items in all, three new dishes counts as an overhaul. Since 2013, Lihua has run a "food festival" every April or May, releasing a new item every week or two; the ones that sell stay on as regulars. It now has around 28 dishes.

"We stopped calling things the 'XX-yuan combo,' too — it sounded too much like desk-lunch food. Now it's 'braised chicken over rice.'" This summer Lihua also plans to add late-night food, using the European Championship and the Olympics to push from desk lunches into casual eating. All of it is aimed at younger customers.

"We have to change. If we don't, we'll lose customers for sure," Zhang Chang says. As he sees it, widening the individual-customer base and building the brand are urgent, and giving up some margin to do it is acceptable. The company hopes to bring costs down through management and operations, but hasn't found a good answer yet.

The same risk sits over Lihua's bigger source of profit: institutional catering, which is more than 50% of revenue.

Ele.me is moving into that business as well, but in Zhang Chang's view, "catering for institutions takes a stronger service philosophy than single meals. Behind it are tests of your raw-material supply chain, your production environment, your safety controls, your guarantees on timing. You can't learn that quickly." Still, for the three big platforms, it isn't impossible.

And the reputation Lihua Fast Food built with individual consumers is wearing away as its market share shrinks.

"Before the platforms you could stay the same. Now you have to change, and if you don't, the road keeps narrowing," Zhang Chang says.

Lihua may not need to be too gloomy, though.

Sun Hao, a former Lihua Fast Food executive, left in 2010 and founded Daojia Meishihui. It is far smaller than Ele.me or Meituan, but its choice to deliver only for branded restaurants also came out of thinking about lasting profitability. Sun Hao once said that whether a delivery platform runs its own couriers or hires a third party comes down to one thing: whether the profit covers the cost of delivery.

He split the restaurant market into three bands by average order size. Under 20 yuan are the small shops and mom-and-pop stores, where staff deliver the food themselves and the platform only brings customers. Between 20 and 40 yuan are the fast-food chains — Lihua, McDonald's, KFC — which earn enough gross margin on the food itself to run their own logistics, and so don't need the platforms much. Above 50 yuan is the band where it is worth a third-party platform putting money into delivery, which is why Daojia Meishihui aimed there. "That's the only way the labor cost gets covered."

Today's delivery platforms offer so much for the money largely because they are subsidizing it, and their users are not loyal to any brand. But the money runs out eventually: "10 yuan off orders over 20" and free delivery are not a stable end state.

When that day comes, will Lihua — which built the ability to deliver in 30 minutes for 3 yuan — surface again?

That depends on whether it can hold out until then.