Ele.me Buys Baidu Waimai: 9 Charts on What the Last O2O Business Standing Has Changed

Tens of millions of people now spend differently. But set against the whole restaurant industry, food delivery is still tiny.

The food delivery platforms are finally down to two.

On the afternoon of August 24, Ele.me announced it had bought Baidu Waimai.

Neither side published the terms.

According to figures disclosed earlier by Caijing, the $800 million deal breaks down like this:

• $200 million in cash, paid by Ele.me to Baidu, and coming entirely out of Alibaba's latest $1 billion investment in Ele.me;
• $300 million in Ele.me stock; once the deal closes, Baidu will own 5% of Ele.me;
• $300 million in traffic. Baidu bundled its entry points — Mobile Baidu, Baidu Nuomi and Baidu Search — priced the package at $300 million and sold it to Ele.me. That traffic is locked in for five years.

Which puts Ele.me's valuation after the merger at about $6 billion.

Baidu Waimai will keep running as a separate brand, and its executives and organizational structure stay as they are for now. Ele.me will also build a second headquarters in Beijing, alongside the one in Shanghai.

Once the partnership takes effect, Baidu Waimai is to concentrate on the high-end market, so the two brands "form a complete differentiation."

Judging by how mergers like this have ended before, a full merger later is the likelier outcome. That is what happened with Didi and Kuaidi, and with 58.com and Ganji.

One Baidu Waimai employee told QDaily: "Technically I suppose we're not Baidu employees anymore, but nothing has actually changed yet."

In the end, two platforms are left

Alibaba put up the money behind Ele.me's side of the deal. Baidu, through the share swap, became an Ele.me shareholder.

Of the two players left in food delivery, Meituan Waimai is the simpler case. Half a year after Meituan and Dianping merged, they had already connected every entry point. Order delivery today through Dianping, Meituan, Meituan Waimai or the third-party section of WeChat Wallet, and the service behind it is Meituan Waimai.

Alibaba and Ele.me are the more tangled case.

In the open letter announcing the deal, Alibaba Group executive vice chairman Joseph Tsai said Alibaba backs Ele.me's consolidation of the delivery market, and that the group will keep giving the new platform heavy support in traffic, financing and elsewhere.

In April last year, Alibaba and Ant Group put $1.25 billion into Ele.me and became its biggest shareholder with 27.7%. Add this new $1 billion round and Alibaba is now Ele.me's dominant owner by a wide margin.

Daojia Meishihui, once a business of some size, was bought in May this year for $200 million by Yum China, the country's largest fast-food chain. Ant Group, for its part, invested $50 million in Yum China.

Besides Ele.me, Alibaba's Koubei invested in Shenghuo Banjing two years ago.

In March 2016, Waimai Chaoren — the standalone Chinese sub-brand set up by the international company Delivery Hero — announced it was leaving China.

Apart from niche services like Jinshisong and Huijiachifan, you would probably struggle to name another delivery company.

In a few days, the delivery services inside Alipay and Koubei will switch over entirely to Ele.me.

In food delivery, two platforms are what remain.

Baidu Waimai has been trying to sell itself for years

Ele.me's story starts in 2010 in Shanghai's Songjiang University Town; its Series A, from GSR Ventures, came in 2011. Meituan did not start delivering food until November 2013.

Baidu was the last of the three in. In 2014 it announced it would go into O2O; having bought Nuomi and launched Baidu Wallet early that year, it launched Baidu Waimai in May. The next year Robin Li said Baidu would burn 20 billion yuan on O2O. Baidu Waimai also raised $250 million on its own, and Baidu said it would spin the unit out to grow independently.

Market share never came easily. Baidu Waimai picked white-collar workers as its way in, but unlike the other two it had no entry point of its own — WeChat, Alipay, Meituan and Dianping, the doors people pass through most often every day, were all closed to it.

Baidu Waimai also built its own courier fleet early and refused third-party delivery. That kept deliveries fast, but it could not expand as quickly as the other two.

Baidu's spending on delivery ended in 2016. The O2O story never convinced overseas investors. Then the medical-advertising scandal hit and Baidu pulled back everywhere. After Lu Qi joined, Baidu Nuomi was moved into the core search division and folded into an advertising platform, while Baidu Waimai turned into a burden Baidu wanted off its books — much like Baidu Literature, sold to Perfect World for 1 billion yuan.

Robin Li put it this way in an interview: "If we can't win, we don't do it."

But because Nuomi had to come with it, no one could agree on a price for Baidu Waimai.

From the middle of 2016 until now, Ele.me, Meituan and SF Express were all possible buyers, but either the asking price was too high or the market share was too low.

In the end, after all that waiting, Baidu Waimai — once valued at $2.5 billion — sold for $500 million.

Baidu Waimai: Three Years

2014.5

Baidu Waimai launches

2015.6

Robin Li says Baidu will put 20 billion yuan into O2O

2015.7

Baidu Waimai raises $250 million; on an earnings call Robin Li confirms it will be spun out to grow independently

2015.12

A fundraising document reveals that in 2015 Baidu Waimai averaged 1 million orders a day, each courier delivered 20 orders a day, and transaction volume for the year would top 8 billion yuan

2016.3

Baidu Waimai closes its Series B

2016.8

Rumors that Baidu Waimai and Nuomi will be sold to Meituan

2017.5

Rumors that Baidu Waimai will be sold to SF Express

2017.8

Ele.me announces it will merge with Baidu Waimai

Food delivery is the one industry from the O2O boom that fought to the end

O2O, which caught on in 2014, meant pulling services out of the store and into your home. The companies used subsidies to get people to summon anything they wanted to their door with one tap.

Manicures, house cleaning, facials, car washes, massages, food delivery. A few years on, the stars of that moment have mostly gone quiet.

Most of those niches collapsed outright. Food delivery went the furthest: it has raised more than $8 billion so far, 40% of what ride-hailing raised.

Ele.me also took investment to buy growth while O2O was hot, reaching more than 250 cities within a year.

Ele.me Timeline

2010.11

Ele.me's mobile web ordering platform launches

2011.3

Ele.me takes a million-dollar investment from GSR Ventures

2013.1

Matrix Partners China puts several million dollars into a Series B

2013.11

Ele.me raises a $25 million Series C, led by Sequoia Capital

2014.5

Ele.me raises a Series D from Dianping

2015.1

Ele.me raises $350 million from CITIC Capital, Tencent and others

2015.8

Ele.me raises a $630 million Series F

2015.11

Takes a strategic investment from Didi Kuaidi

2016.4

Alibaba and Ant Group take a stake in Ele.me

2017.6

Alibaba puts $1 billion into Ele.me

2017.8

Ele.me buys Baidu Waimai

The subsidies that began with group buying carried straight over into delivery.

Meituan came out of the war of a thousand group-buying sites alive. After merging with Dianping, Meituan-Dianping also raised a $3.3 billion Series E, mostly for delivery. Seven years after it was founded, Meituan-Dianping was worth $18 billion.

How Meituan Waimai Got Here

2013.11

Meituan Waimai launches

2015.10

Meituan and Dianping announce their merger

2016.1

Meituan-Dianping announces a $3.3 billion round

2016.7

Meituan-Dianping takes a strategic investment of more than $100 million from China Resources

2017.6

Meituan Waimai says it is completing more than 12 million orders a day, worth more than 500 million yuan

In July 2016, Wang Xing announced in a speech that the Chinese internet had entered its "second half," and that every Meituan business except delivery was already profitable.

In this supposedly post-subsidy second half, Meituan was still dropping a 4-yuan cash red envelope on every order, and Ele.me was varying its subsidy by time of day.

The burning had not stopped. But delivery had already changed how people behave — a little.

Fewer than 80 million people install a delivery app. Most just want to be full

At the end of 2015, Baidu Waimai, Ele.me and Meituan Waimai together held more than 85% of China's food delivery market.

Nearly two years on, no new challenger has appeared, and the three together hold 96.7%.

But according to data Aurora Mobile gave us, as of the end of July this year, delivery apps had reached only 11.1% of China's mobile internet users.

In other words, only a little over 80 million people want delivery badly enough to install an app for it. Everyone else orders through a handful of big apps — WeChat, Meituan, Alipay.

According to a report from BigData-Research, China's third-party delivery market handled 176.15 billion yuan of transactions in 2016, at an average order value of about 20 yuan. The market had 171 million users in 2016, each spending an average of 1,030 yuan a year on delivery.

Work it out and each user ordered about 51 times a year — close to once a week.

Those 171 million people are obviously not evenly distributed, which means most of them do not order often. Only a few tens of millions really live on delivery apps. The rest order because of the weather, or because they do not want to leave the house on a weekend.

According to a report the Meituan-Dianping Research Institute published last year, going from dry weather to moderate rain leaves order growth steady at around 8%; once moderate rain turns into a downpour, orders jump to 20% growth.

Ele.me's data shows weekend orders account for close to 30% of the week's total.

And a 20-yuan average order says delivery is still mostly about getting fed.

Delivery supports hundreds of thousands of full-time couriers, and has created millions of part-time jobs

Since 2015, the streets of Beijing, wide and narrow, have belonged to delivery couriers every day at noon. Riders in red, yellow and blue thread through the avenues and alleys.

By an April estimate from the delivery platform Ele.me, roughly 10 million people nationwide have delivered food. That number includes people who signed up and took a handful of orders, or none at all; far fewer do it as their actual job.

By the companies' own numbers, Meituan and Baidu currently have 300,000 and 80,000 active couriers. Working backward from market share, Ele.me has about 220,000.

In August 2015, Ele.me proposed handling deliveries through its Fengniao (Hummingbird) system, using crowdsourced logistics. Ele.me is not alone in this: merchants on Meituan and Baidu Waimai also use third-party couriers. Recent figures show Dada already has more than 3 million crowdsourced riders, and they do not only carry food — they also run errands and deliver supermarket orders.

Alibaba's and Meituan's fresh-grocery businesses have both made delivery their main route to expansion.

But delivery's effect on the restaurant industry is still small

According to the National Bureau of Statistics, national restaurant revenue reached 3.5799 trillion yuan, up 10.8% year on year. Delivery's 170-plus billion yuan is 4% of that.

Restaurants themselves have not changed much, other than the arrival of a lot of kitchens that cook only for delivery. And those are still a small corner of the industry.

The burning won't stop soon, and it still comes down to those two companies

Meituan and Ele.me have both said publicly that people will keep ordering delivery even without subsidies — that delivery will not die the moment the money stops, the way on-demand massage and manicures did.

Delivery platforms really can make money. Besides taking a cut from restaurants and keeping the gap between the delivery fee a customer pays and what a courier earns, each platform also charges merchants for search placement, the way Dianping and Meituan do.

The question is how much. Once the subsidies stop, how much of the habit is left, and was it worth the several billion dollars it cost? If billions of dollars of investment buy only tens of millions in annual profit, that is not a healthy business.

Neither side has proved it yet. And the subsidies probably cannot stop.

With Baidu Waimai, Ele.me — already the leader — gets bigger.

Meituan and Dianping are still the doors closest to what Chinese people spend on eating. But starting at the end of this month, Ele.me's largest shareholder, Alibaba, will give it more help: the delivery service embedded in Alipay, now Taobao Waimai, becomes Ele.me. And Ele.me has Baidu's traffic on top of that.

If this were only a contest between Meituan and Alibaba, the two platforms would probably become one sooner. Meituan is still burning investors' money; Alibaba is China's most valuable listed company, earning several billion dollars in profit every quarter.

Why Alibaba and Alipay keep feeding Ele.me is not hard to work out. Delivery generates more orders than ride-hailing, and those orders shape how people pay. That is exactly what WeChat and Alipay have been burning money over this year.

Meituan still offers Alipay, but at checkout it shows Meituan's own payment method and WeChat Pay by default. Alipay is buried under an "Other" you have to tap open. Choose it and you get a notice saying there is no discount.

Meituan Waimai already has a door inside WeChat Wallet, and WeChat's social network is wired into Meituan and Dianping's data. WeChat can do a great deal — at the height of the ride-hailing war, it shut down every one of Uber's accounts.

If only for payments, Tencent and Alibaba are unlikely to let the delivery fight end soon.

Even in the second half Wang Xing talked about, the money keeps burning. And the winner will still be decided by the two companies that control the entire Chinese-language internet.

Charts by Xiuxia Feng

Cover image from VisualHunt