New Market After New Market, Deal After Deal: What Kind of Company Is Meituan Now?

Capital changed Meituan, Didi and companies like them — and those companies changed capital right back.

What kind of company is Meituan? The question gets harder to answer every year.

It is burning cash in Shanghai, paying a 14-yuan subsidy per ride to take business from Didi. It bought Mobike for $1 billion in cash, $1.7 billion in stock and $1 billion of assumed debt. Bike-sharing — a business that keeps burning money and turning no profit — is now a Meituan business too.

Mobike's management team stays in place, while Wang Xing, Meituan's CEO, becomes Mobike's chairman. Of the more than 40 outside investments Meituan has disclosed, Mobike is the largest.

Outside the three old giants — Alibaba, Tencent and Baidu — the biggest spenders among China's internet companies are Meituan, Didi and JD.com.

Didi bought Kuaidi and Uber China to end competition inside its own business. JD.com, whose revenue picture is far healthier than either company's, buys mostly e-commerce assets, and has yet to do a single deal worth $1 billion.

New market after new market, deal after deal: the two businesses the company grew out of — group buying and Dianping's restaurant reviews — are now among the smaller pieces of its sprawling operations. Meituan has become the strangest case in the Chinese internet.

Group Buying, Food Delivery, Hotels, Ride-Hailing… Each Is Only Part of Meituan

In its most recent reorganization, Meituan sorted its businesses into four settings — in-store, at-home, travel and mobility — and four units: a new In-Store Business Group, a Retail Business Group, a Hotel & Travel Business Group and a Mobility Business Unit.

Compared with the internal shake-up a year earlier, the main change is the new Retail Business Group, which oversees fresh-grocery retail, food delivery, logistics and restaurant B2B. Its president is Wang Huiwen.

Wang Huiwen, who once launched Meituan's food-delivery business, also runs the new Mobility Business Unit, whose stated job is to "give consumers richer, better mobility options."

The new In-Store Business Group was assembled out of the old in-store dining, dining ecosystem, general in-store and smart-payment units. It covers group buying and in-store retail, where Meituan is the market leader.

But in the second half of last year, Alibaba folded Koubei into its New Retail system, and Koubei began pushing its standalone app hard. A January 2017 round valued Koubei at $8 billion; its listed American counterparts, Groupon and Yelp, were worth $2.45 billion and $3.51 billion.

The Retail Business Group covers fresh grocery, food delivery and logistics. According to Aurora Mobile's iApp tracking platform, as of July 2017 — before Ele.me bought Baidu Waimai — delivery apps had reached only 11.1% of China's mobile internet users. Within that small market, though, three platforms already held 96.7% of the country's share. In early April, Alibaba bought Ele.me outright at a $9.5 billion valuation. Food delivery has become a fight between Meituan and Alibaba, which is to say a fight between Tencent and Alibaba.

The Hotel & Travel Business Group was upgraded from the old Accommodation Business Unit. Meituan entered the travel industry in 2012, mainly selling group-buy hotel deals, and has done well since: in 2017 it booked more than 200 million hotel room-nights. The biggest company in the industry is Trip.com Group, worth $22.46 billion. Meituan also owns Zhenguo Homestay, a home-sharing service that has run for more than a year without catching fire and now sits inside the travel group; there Meituan is not in the top three, trailing Tujia, Xiaozhu and Airbnb China.

The Mobility Business Unit is Meituan's youngest business. Counting from Meituan Dache's launch in Nanjing on Valentine's Day 2017, it is just over a year old. Wang Xing told Caijing magazine that ride-hailing, like food delivery, is a location-based service (LBS): the two are alike in that both are "tied to the offline world, need a presence in every city, and use the internet to improve the experience and cut costs."

After a $4 billion round late last year, Didi, the market leader, was valued at $56 billion. Ahead of Meituan Dache are also Shouqi Yueche, UCAR, Yidao and Dida, which changed its name not long ago.

Now the list has one more entry: bike-sharing, a business with no profit, very little revenue and a mountain of debt.

Wang Xing has an explanation of his own.

"It looks like we do everything, but in fact we only do one thing." Wang Xing calls Meituan an e-commerce platform that sells services. "The people who want to eat out, order delivery, see a movie, travel or rent a car are basically the same people," he says.

From group buying to food delivery, you could call Meituan the Taobao of services. Restaurants, attractions and hotels all post their information on the platform; users spend money there and leave reviews, and other users read those reviews and decide where to spend.

Building a marketplace that displays reviews and information is close to the oldest business model on the internet. The marketplace collects its advertising money when it decides how to display a merchant.

Ride-hailing does not work that way. A passenger cannot really choose a driver; who gets an order depends mostly on who is closest. Driver ratings exist mainly to weed out the worst ones.

Nor can Mobike and ofo still be called location-based services. After a year of the bike-sharing bubble, people do not look for a bike on a map — they see one at the curb and scan it.

Paying $1 billion in cash and taking on $1 billion in debt for Mobike, a business with almost nothing to do with anything Meituan already does, invites the question of how much of the deal was about the business and how much was about getting Tencent's money back.

Asked in an earlier interview who Meituan's friends are in the internet industry, Wang Xing named Tencent. "It is also one of our most important shareholders," he said.

Group buying, food delivery and ride-hailing do have something in common: all three are cheap to start. None of them needs warehouses across the country, as JD.com's business does, or years of building data centers, as Amazon's cloud does.

The new businesses Meituan picks are all operations-heavy ones where revenue arrives the moment the money goes out. Spend, and you get revenue and active users at once. As Wang Xing puts it, it is "the same group of users."

This is not the first time Meituan has jumped as far as it jumped from food delivery to ride-hailing.

Burn Cash for Growth, Then Start a New Business to Get More Cash to Burn: It's a Loop

When it started, Meituan was a careful spender.

It went live in March 2010. Wang Xing called it "a new kind of group-buying site," selling one item a day — a wine-tasting set that normally cost 100 yuan, at half price.

Its benchmark was Groupon, the American group-buying site, then valued at $1.35 billion. By the time Meituan launched, China already had dozens of companies running the same model.

Group buying makes money from the day it opens. Two months in, Meituan had a gross profit, though not yet a net one. Rivals such as Lashou and Nuomi had already raised venture money.

While those rivals burned cash on street teams and advertising — some using an agent-driven expansion model to win still more investment — Wang Xing had no new funding and insisted on selling in-house, calling on merchants one by one. Meituan moved slowly then, posting a single group-buy deal a day like early Groupon, but it vetted its merchants and sent all its traffic to one at a time. Merchants liked that better than the sites running dozens of deals a day.

By the time Meituan closed its Series B, the Series A money was still in the bank.

By using its capital more efficiently and giving users a better experience — Meituan was the first group-buying company to let people cancel an order — it became the biggest group-buying site while hundreds of competitors died. By 2012 its main rivals were Dianping and Nuomi.

In 2013 Meituan turned a profit for the year. But the cash-burning soon found a new direction: from 2014 on, every player pushed into at-home services beyond group buying.

What ended the group-buying war was Meituan's merger with Dianping in November 2015.

Wang Xing and Dianping's founder, Zhang Tao, became co-CEOs, but the Dianping team stepped back soon after, so in practice Meituan had bought Dianping — its first big acquisition.

After the deal, the merged company held more than 80% of the group-buying market, and its valuation rose from $7 billion to $15 billion.

Nothing could really threaten it in group buying or restaurant reviews. Baidu pushed Nuomi for a while afterwards, but its American shareholders would not pay for market share that way.

The profit Wang Xing had promised back in 2011 finally looked within reach. But having bought Dianping, Meituan could no longer stop.

By then neither profit nor an IPO was a real choice. Profit would mean holding down spending and slowing growth — and even a profitable group-buying business is not a big business.

An IPO was out too.

The two American internet companies that matched Meituan and Dianping were already public. Yelp, which owned restaurant reviews in the United States, was worth $2.05 billion in November 2015; Groupon, the leading group-buying company in several countries, $1.77 billion at the same date. The merged company's valuation was four times the two combined. Going public far below its earlier valuation would have cost its investors money.

So Meituan poured money into a new business to hold up that towering valuation: food delivery.

Meituan had been famous since the group-buying war for its nationwide street-sales force. Moving from group buying to food delivery, that force turned out to be useless.

Wang Huiwen, who ran the delivery business, said in a 2015 speech that group buying and food delivery were so different that experience did not carry over. He remembered: "When our first batch of city managers came back for a meeting — 30 city managers — only two knew what they were doing."

Food delivery needs subsidies to get started. Even before the Dianping merger, Meituan Waimai had already fought a subsidy war.

Meituan Waimai launched in November 2013. In the first half of 2014, Ele.me pulled in users with "8 yuan off a new user's first order" and "18 yuan off orders over 50 yuan." When Taobao's restaurant platform Taodiandian moved into Guangzhou, it briefly ran big promotions offering 50% cash back on an order, or a free second order.

Meituan happened to catch the new round of delivery subsidies that began as Baidu went all in on O2O. Baidu World that year was given over entirely to how Baidu would make money by connecting offline businesses through the internet.

Around January 2016, the delivery industry started raising enormous sums. Ele.me took $1.25 billion from Alibaba, and Meituan soon announced a $3.3 billion round at an $18 billion valuation. Baidu's O2O spending was huge as well: its results at the time showed that heavy spending on delivery and group buying pushed costs up so fast that Baidu's quarterly profit fell 27%.

Meituan's round set a record for the internet industry, and it also left Meituan needing growth to prove it was worth that much.

The money went into food delivery.

Delivery returned enormous numbers: today Meituan Waimai handles tens of millions of orders a day. And those numbers brought Meituan an enormous valuation.

But what would happen if the company decided to make a profit and stopped subsidizing delivery?

As long as a competitor keeps subsidizing, users switch over at once.

After Uber China and Didi announced their merger in July 2016, Wang Xing said in a speech that every Meituan business apart from delivery was profitable overall: dining, entertainment, movies, travel, and flight and hotel booking. In that same speech he put forward the idea that "China's internet has entered its second half."

The "second half" was new. The talk of profit was no different from what Wang Xing had said in 2011, when he promised group buying would be profitable the following year.

In mid-2017 Meituan announced it had broken even. Chen Shaohui, a senior vice-president, said: "Meituan's business as a whole has broken even, revenue is up triple digits year on year, and the company has plenty of cash — actual reserves on the books now exceed $3 billion." Wang Xing said: "If we didn't open up new businesses, we could be profitable at scale within a year, but I don't think short-term profit is what we're after."

Just as Meituan said it "could" make a profit, Baidu Waimai was running out of road and Ele.me was visibly short of money.

But Alibaba would not give up the delivery market — it mattered too much to payments, especially after its relationship with Meituan turned hostile. So Alibaba put money into Ele.me round after round, and in August 2017 helped it buy Baidu Waimai.

Meituan answered in October 2017 with a new $4 billion round, at a $30 billion valuation.

The cash kept burning in delivery, and Meituan was back at its perpetual question: how to justify the new valuation.

We soon found out: ride-hailing.

Didi, the company Meituan barged in on, had been saying much the same thing about profit that Meituan said about delivery. According to documents obtained by the financial outlet Wall Street CN, Didi had planned for part of its business to turn a profit. Total losses came to $300-400 million, more than $200 million of that in the core business. The projection given this March was that the core business would be profitable this year, perhaps by close to $1 billion.

But in China, Didi's most important market, the ride-hailing fight is far from over. Meituan Dache entered Shanghai on March 21, recruiting drivers by taking no commission, and set off another round of heavy subsidies with Didi. Dida is still courting new users with drivers and coupons, and Amap has launched carpooling in Wuhan and Chengdu, also without taking a commission.

To hold up its new valuation, Meituan went into ride-hailing and burned cash for growth, forcing Didi into another round of burning cash.

At the same time, Didi announced it was entering food delivery, giving that still-burning market one more competitor.

Meituan's new businesses

2010.3

Meituan.com goes live

2012

Meituan launches movie ticketing

2013.11

Meituan Waimai launches

2015.4

Launches an open platform for at-home services, signing up providers of housekeeping, beauty, car washing and other at-home categories.

2015.7

Sets up the Food Delivery & Logistics Business Group and the Hotel & Travel Business Group

2016.2

Meituan Pay launches

2016.5

Meituan shuts down its physical-goods e-commerce business

2016.7

Merges its in-store, delivery and ecosystem platforms into a dining platform

2016.10

Buys Qiandaibao, gaining a third-party payment license

2017.2

Meituan Dache launches in Nanjing

2017.2

Meituan sets up a 3-billion-yuan consumer industry fund, with money from Tencent and others

2017.4

Meituan's home-sharing business, Zhenguo Homestay, launches, along with a standalone Meituan Travel app

2017.7

The fresh-food store Zhangyu Xiansheng opens

2018.3

Meituan Dache enters Shanghai, setting off a new ride-hailing subsidy war with Didi

2018.4

Buys Mobike

Meituan has survived one "war" after another, which naturally says something about how well it is run.

But each time, it has had to spend more money to keep growth up and the valuation rising. When the old market can no longer carry that valuation, it moves into a new one. It raises money to enter the new market, then has to burn money to keep the new business growing, which brings in more revenue and a new valuation.

With enough money behind them, delivery and ride-hailing both produce big growth figures quickly; sustained losses buy enormous numbers. Over the past year 320 million people bought something on Meituan at least once, daily delivery orders reached 20 million, and Meituan's 500,000 riders delivered 7 billion meals.

About whether the company can make money, Meituan has disclosed nothing at all.

That is different from the way an earlier generation of internet companies used large losses to build markets. Those companies dug moats with sustained investment. Today Amazon's cloud business and its commercialization of voice devices have left companies thought of as more technical, Microsoft and Google, behind. Google and Baidu are unshakeable in their own search markets. JD.com's delivery network is still what most sets it apart.

That Meituan can do ride-hailing and Didi can do delivery shows how low the barriers all that money has built really are.

Capital Changed the Companies, and Got Swept Into the Mega-Projects Too

Internet companies chasing growth and valuation, unable to slow down or stop losing money, are not only a Chinese problem. Most highly valued young Silicon Valley companies are the same.

Bill Gurley, the well-known Silicon Valley investor and an early Uber backer, wrote a widely circulated piece in 2016 about the unicorn problem — it can be read as an open letter to Uber. His answer: more fundraising only brings more trouble. Stop trying to expand by raising money, and get the company's profitability in order first, even if that means cutting the valuation and reining in spending.

But at a valuation of tens of billions of dollars, cutting your own valuation has become very hard to do.

And founders are not the only ones who need to adjust. Round after round, these companies have changed capital just as much.

SoftBank once turned an investment of a few tens of millions of dollars in Alibaba into tens of billions. Today a few tens of millions is nowhere near enough to carry a new company.

Meituan's funding timeline

2010.9

Sequoia Capital, $12 million, Series A

2011.7

Alibaba leads a $50 million Series B, with Sequoia China, Northern Light Venture Capital and Walden International participating

2014.5

General Atlantic, Sequoia Capital and Alibaba, $300 million, Series C

2014.12

China Asset Management, $700 million, Series D

2016.1

Tencent leads a $3.3 billion Series E

2016.7

China Resources invests $100 million or more

2017.10

Tencent leads a $4 billion Series F

The sums capital bets on a single company keep rising.

Part of the reason is that there are fewer and fewer new companies worth investing in. Tech fundraising overall has fallen somewhat, yet the rounds raised by the largest few companies keep setting records. Capital is putting a bigger share of its money into a handful of companies that are already huge.

Meituan or Didi, capital can no longer walk away from these companies.

They cannot fail and they cannot stop growing — even if that growth means burning still more money, while waiting for a new opportunity that may, or may not, turn up.

"In the internet age, launching a product has become easier than ever, but building a company is as hard as it always was." Wang Xing wrote that on Fanfou in 2011.

Isn't that the truth.

Cover image by EmreAyar on Visualhunt.com /CC BY