Seven Years After Launch, Meituan Owns the Market but Still Doesn't Make Money — What Can Its New Industry Fund Fix?

It has cornered the market and still sees no path to profit. What do you do when the internet's "second half" arrives?

Hardly anyone uses Fanfou anymore, but its founder, Wang Xing, still posts there at least once a day.

Last Saturday was Meituan's seventh anniversary. A few minutes after midnight, Wang Xing put up a Fanfou post: "The first person to message me congratulating Meituan on its seventh anniversary turned out to be a former rival. I believe he now sincerely hopes that, with all of them off the stage, Meituan can carry through this industry's unfinished ideal."

2011 was roughly the peak of the group-buying wars. China had about 5,000 group-buying sites, large and small. Groupon, which invented the group-buying business, had moved into China too.

That October, Wang Xing and Du Yinan, founder of the rival group-buying site 24Quan, spoke together at an industry event. Asked about competition, Wang Xing said only 0.1% of group-buying sites would survive, and "at least one" of them was on that stage.

Gaopeng, the joint venture Groupon set up with Tencent, and 24Quan both vanished from the group-buying market soon after, along with nearly 5,000 other group-buying sites, large and small.

Meituan, just as Wang Xing said, became that 0.1%. After it merged with Dianping in October 2015, group buying in China was basically one company's business.

Baidu Nuomi, the group-buying platform Baidu said it would spend 20 billion yuan on, has already begun mass layoffs. Koubei, which belongs to the other giant rival, Alibaba, doesn't have group buying as its main business either.

In seven years, Meituan beat every group-buying competitor. But the profit Wang Xing promised for 2012 never arrived.

In July 2016, Wang Xing talked about Meituan's future again. This time he called it the second half: "The past four years, I think, were the first half of 'Internet Plus' — the half defined by the user dividend, by the fast growth in user numbers… Now we've reached a critical turning point. In the second half ahead, what matters isn't only widening the user base; we also have to go deeper with those users." He returned to "first half" and "second half" several more times in later speeches and interviews.

Before, Meituan didn't have to think about profit or loss; it carried a huge pile of funding and used it to beat its rivals. Now it has to prove it can make money — that it is a business worth US$18 billion.

Meituan has tried plenty of new businesses, from movie tickets to cloud computing, each one a direction it picked for itself.

The latest step is investing. In late February, Meituan announced it was setting up the Meituan Industry Fund, which will focus on early-stage deals across the broad consumer sector.

Meituan has been busy investing for more than two years

At the end of 2014, Chen Shaohui joined Meituan as vice president of strategy and investment and built its strategic investment department. Before that he was executive director of Tencent's industry fund and assistant general manager of Tencent's investment and M&A department, with nearly a decade of investing behind him.

Meituan soon announced its first deal: a mall Wi-Fi service provider.

Chen Shaohui appears on the shareholder lists of nearly ten portfolio companies, including Biqu Technology, Puzhao Tianxing Technology and Biyanghong, and he is CEO of the new Meituan Industry Fund. According to information Meituan has released, he also worked on the Meituan-Dianping merger.

The new fund expects to raise 1.5 billion yuan in its first close, with a target size of 3 billion yuan. The money comes from Meituan, Tencent, New Hope Group and others.

A former senior Meituan manager familiar with the situation told QDaily that the strategic investment department will most likely stay in place — one team with two nameplates.

Two large companies, Tencent and New Hope, are involved, but the fund is still Meituan's. From its name to its staffing, it has little to do with Tencent. Tencent has said nothing publicly about it either; its role is closer to that of a resource provider.

The fund has also hired its first founding partner, Zhu Yonghua, formerly executive director of Legend Holdings and a partner at Tiantu Capital. An investor close to Wang Xing says the partner is already in place. Meituan says the fund has existed for a while and simply hadn't been made public.

The first 1.5 billion yuan is not much next to comparable industry funds. Tencent's Industry Win-Win Fund raised roughly 5 billion yuan when it started, and three years later had grown to about 20 billion yuan.

For Meituan, though, 1.5 billion yuan is not small. Since its US$3.3 billion round in January 2016, it has taken only one further strategic investment, from China Resources last August — while it loses at least 10 billion yuan a year.

Money like that has to solve a problem.

Only a small share of its past investments fed its own business

Meituan has made more than 30 investments. We found public information on 17 of them, and only four of those feed Meituan's own business.

The stake it took in Aixianfeng late last year, for instance, supports Meituan Waimai's convenience-store deliveries; the September 2015 investment in Zhaimi, a campus life-services platform, was meant to fill out the campus market.

Take Zhaimi. After it took Meituan's money, the two sides worked together on both business and technology. Zhaimi, which concentrates on campus O2O, works much the same way: at night, in specific locations — on campus — Meituan Waimai's convenience-store service hands users over to Zhaimi. The traffic Meituan sends now converts at a steady 15% or so, meaning 15% of Zhaimi's daily orders come from Meituan.

Most of Meituan's existing investments are about selling paid services to merchants

More of Meituan's investments serve the merchants on its platform. Chen Shaohui said in a 2015 speech: "Meituan has done a run of deals lately. We're open-minded enough about it — we want the companies we invest in to grow on their own. Some of their business connects to Meituan, but some of it also runs with our peers."

Most of the Meituan investments that show up in public records are startups selling services to merchants: the commercial Wi-Fi provider Xiaobo Wireless, the guesthouse management system Fanqielaile, the restaurant point-of-sale system Canxingjian, the hotel information management system Biyanghong.

Biqu Technology, which builds direct ticket-sales platforms on airlines' own websites, took Meituan's Series A last May. The technical interface behind airline-direct ticket sales on Meituan today is Biqu's work.

Biqu CEO Ma Guohua told QDaily that Meituan's investment team first got in touch through the customer-service phone line, when Biqu's own app had been live only a few months. Raising money, Ma took his team through more than twenty pitch meetings, and chose Meituan in the end because "Meituan doesn't only have money, it has customers and traffic."

After it took Meituan's money, the two sides worked together on both business and technology.

Meituan's investments and acquisitions at a glance

2016.11

Invested in community convenience store Aixianfeng

2016.09

Bought third-party payment company Qianbaobao, and with it a payment license

2016.06

Invested in Meijiabang, a mobile manicure community where nail technicians open micro-shops to sell their services

2016.06

Invested in Canyin Laoban Neican, which runs media and online training for restaurant professionals

2016.06

Invested in Biqu Technology, which builds direct ticket-sales platforms on airlines' official websites

2016.05

Invested in Yijiupi, a trading platform where merchants look up and order liquor

2016.05

Invested in Shuidi Mutual Aid, a mutual-aid insurance community that helps cover users' medical costs, founded by former Meituan Waimai head Shen Peng

2016.04

Maoyan Movies was spun out of Meituan, bringing in Enlight Media as a shareholder, at a valuation of 8.3 billion yuan

2015.12

Invested in Fanqielaile again

2015.12

Invested in Biyanghong, which sells booking-information management systems to hotels

2015.10

Meituan announced its merger with Dianping

2015.09

Invested in campus life-services platform Zhaimi

2015.09

Invested in Canxingjian, which sells restaurant information management systems

2015.07

Bought the travel search and booking site Kuxun Travel

2015.04

Bought Yaokong Restaurant, whose main business is queue-based information management services for restaurants

2015.03

Invested in Tongda Kuaisong, the Tongcheng Express brand that handles offline delivery for large restaurant chains such as McDonald's and KFC

2015.01

Invested in Fanqielaile, which digitizes small and mid-sized hotels and guesthouses

2014.11

Invested in mall Wi-Fi service provider Xiaobo Wireless

Like the restaurants and beauty salons that join the platform, these service providers exist, in the end, to keep users with Meituan and Dianping.

Selling those companies' services to merchants for money is something Meituan has only just started trying.

Last December it set up a Restaurant Ecosystem Business Unit of 2,000 people, mainly to sell restaurant software that meets its platform's standards. Most of the portfolio companies that supply information services to merchants — Canxingjian and Yijiupi among them — have plugged into that restaurant ecosystem platform.

With 1.6 million merchants on the platform, Meituan also wants a financial services business.

Last September it paid a large sum for a third-party payment company — for the payment license. Some analysts put the price between 800 million and 1.3 billion yuan. Meituan Pay is now the default when users pay on Meituan Waimai, Meituan or Dianping. Meituan then picked up a microlending license as well, and the bank it helped set up has been approved by regulators. Financial services for small merchants may be where it concentrates.

Beyond finance, Meituan has built internet infrastructure services too — Meituan Cloud. Launched in 2013, Meituan Cloud now pushes restaurant cloud, travel cloud and hotel cloud services, all of them enterprise packages built on Meituan's own businesses.

Look closely at the splash screen of a Meituan app and you can find the line "computing services provided by Meituan Cloud." Past that, Meituan Cloud has almost no customers outside Meituan; the case studies on its website are few, and none are big.

Selling services to small merchants may not be easy. If Meituan finished group buying's cash-burning "first half" by merging with Dianping and buying market share, then in every corner of merchant services there are still crowds of startups living through the same two or three early years Meituan once lived through: none of the companies Meituan has backed is the largest in its niche, or else the whole niche is still giving services away to teach the market what they are.

Now Meituan has set up an industry fund, run at arm's length, and says it will invest on both the consumer side and the merchant side. Wang Xing, Wang Huiwen and other Meituan executives make up the fund's strategic advisory team.

So will the new industry fund invest in Meituan's own merchants?

According to Meituan's official announcement, the fund will put 30 million to 100 million yuan into each project, in local-services fields including restaurants, retail, hotels and travel, and leisure and entertainment. It will also keep recruiting investors with consumer-goods backgrounds into the management company.

Introducing founding partner Zhu Yonghua, Meituan stressed his investing record in e-commerce, consumer life and education: he has led investments in more than 40 projects, among them Jiubianli, Jinzai Xiaoyu, Zhou Hei Ya, Beile English and Tianxin Yaogun Salad.

Judging by the fields, the check sizes and the partners' backgrounds, the Meituan Industry Fund may well invest in some of the merchants already on its platform.

Meituan's advantage in backing restaurant, hotel and other consumer brands is its sheer user volume. Wang Xing has said Meituan handles more than 13 million orders a day, and that food delivery peaks at 7 million orders a day.

Restaurants throw off a lot of cash at high gross margins; national restaurant revenue reached 3.2 trillion yuan in 2015. But they are not internet companies — they cannot return a hundred times the money in a few years.

For Chinese venture capital, restaurant deals usually mean long holding periods and a hard road to an IPO; acquisition is the main way out. Honggu Capital, which invests mainly in restaurant brands, uses a single store recovering its costs within a year as one test of a good project.

Reviewing the analysis Meituan did of the restaurant industry before it went into food delivery, Shen Peng, then the company's director of business development, told an industry salon: "Capital markets don't think much of the valuations of internet companies tied to restaurants, and that's determined to some degree by where this business model's market ends up."

Three years ago Shen Peng spent ten months with his team studying the restaurant industry's upstream and downstream, and in the end Meituan did only food delivery.

Even if the fund invests in consumer brands now, it won't bring Meituan much revenue any time soon.

Meituan's problem is that it raised too much money

Over seven years, Meituan's most mature business has been sending foot traffic to offline merchants. The group buying Meituan started with and the restaurant reviews Dianping built its name on are both that same business.

In the second half of last year, Wang Xing said that apart from food delivery, the other businesses were "profitable overall." Those others include dining and entertainment, movies, travel, and flight and hotel booking. He did not say which of them actually made money, or how much.

Groupon and Yelp have group buying and restaurant reviews in Europe and the US to themselves. In their most recent quarters, Groupon's revenue grew 2% year on year and it lost more than US$52 million; Yelp did better but earned only US$2.1 million. The two companies' market caps together come to US$4.79 billion.

Wang Xing said long ago that the group-buying model can reach a 40% profit margin in the US, but only 10-15% in China.

In seven years Meituan spent billions of dollars beating its rivals and reached a valuation of US$18 billion. To deserve a valuation three times theirs, it now needs to make money far better than Groupon and Yelp do.

So it launched one new business after another. From 2012 Meituan sold movie tickets online; at the end of 2013 it started its own food delivery; from 2015 it pushed hotels in third- and fourth-tier cities; Dianping's Shanhui flash-discount business and its home-services business were attempts of the same kind, outside group buying.

Most of them have not made a profit.

Meituan's core business is now split into what it calls three major business groups: the Restaurant Ecosystem Platform, the Meituan Platform, the Hotel & Travel Business Group, and the Dianping Platform and General In-Store Business Group.

Meituan has lately struck deals with some high-end hotel brands, but its hotel and travel business is up against Trip.com Group and Qunar. Since their merger, those two have all but taken over the profitable business-travel market, and both hold equity ties with BTG, Huazhu and Plateno. Meituan's hotel booking, by contrast, is built for users checking in the same day.

Food delivery, still burning cash against Baidu Waimai and Ele.me, is stuck in the so-called first half, trading subsidies for market share. Even if Meituan Waimai does crush its rivals, delivery may not repay what has gone into it.

Meituan has also started testing a ride-hailing service in Nanjing.

After Didi merged with Uber China last August, it had China's ride-hailing market to itself. Local ride-hailing rules issued in the second half of last year have squeezed Didi's Kuaiche service, but a new platform like Meituan would still have to pour money and people into attracting drivers and passengers.

Mature businesses that don't earn enough, new businesses that still burn cash: Meituan has its eye on finance and investment.

Didi, another company that owns its market and still sees no path to profit, is thinking the same way. People in different departments told QDaily that Didi has recently assembled a financial services team of more than a hundred.

Subsidize, beat every competitor, take the whole market, then make money. That logic is the internet company template, applied to one industry after another. Meituan, Didi and 58.com all followed it. Mobike and ofo are on the same road now.

But no company has yet proved that a market conjured up by subsidies turns, once it is yours, into a profitable business.

Cover image by cobaltfish via VisualHunt.com / CC BY-SA