China’s food delivery war rages on as the three big platforms, Alibaba, Meituan, and JD.com, vie to become the ultimate gateway for consumer spending in Asia’s largest economy.
The battle ignited by JD heated up further over the weekend, with platforms announcing that both orders and users had reached record highs on the back of heavy subsidies. The frenzy came after reports that some users had received free bubble tea and coffee over recent weekends, leading to a surge in shares of Hong Kong-listed Chinese bubble tea brands.
With the subsidy war lasting longer than expected, it is set to hamper platforms’ profits for the second quarter as well as the full fiscal year, analysts warn. Following the intensifying competition, investment banks including Morgan Stanley, UBS and Citigroup have cut their target price of Alibaba, whose shares have gained more than 30% thanks to its artificial intelligence initiatives involving its competitive open-sourced models.
Early this month, Morgan Stanley lowered its target price for Alibaba’s American Depositary Receipts (ADR) to USD 150 from USD 180. The bank noted that Alibaba invested approximately RMB 10 billion (USD 1.4 billion) in food delivery and instant retail services in the April-June quarter, saying the move has put its short-term profitability under pressure.
Lowering Alibaba’s ADR target price to USD 148, Citi analyst Alicia Yap said she expects a 15% fall in Alibaba’s group profit for the April-June quarter and an 11% drop for the full fiscal year, with profits for its Taobao and Tmall Group tumbling 18% in both periods compared to last year.
Early this month, Taobao announced a RMB 50 billion (USD 7 billion) subsidy plan to distribute large-value coupons, free order cards, and subsidized fixed-price products to consumers, as well as various forms of subsidies for merchants. It said the subsidies would be in place for the next 12 months, but it is not clear how much will be doled out incrementally and how much is in the form of actual cash or waiving certain fees for merchants.
The food delivery platforms have also been bombarding consumers with offers on Saturdays, with Taobao pledging to distribute a limited number of coupons worth up to RMB 188 (USD 26.3) and Meituan trying to match Taobao’s offer. JD offered 100,000 servings of premium crawfish for RMB 16.18 (USD 2.3) each to users across the country.
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JD announced its entry into the sector in February, as Meituan, traditionally focused on food delivery, began expanding into the broader instant retail market by selling a wide range of products, posing a direct threat to JD’s core business. In response to the increasing competition from its e-commerce rivals, Alibaba merged its food delivery platform Ele.me and its online travel platform Fliggy into its China e-commerce business group, aiming to provide these apps with greater resource support to fend off rivals.
According to QuestMobile, the shared user base across JD, Meituan, and Ele.me apps in May grew to 77.61 million, up 32.4% from last year. Meanwhile, the share of loyal users for JD and Meituan has dropped, reflecting a stronger tendency for users to shop around.
Citi’s Yap expects JD’s net profit for the second quarter to drop 68% to RMB 4.7 billion compared to last year, despite revenue growth of 15.3% for the year.
Goldman Sachs said in a note this month that the duration of investments in instant retail this time will extend for longer, as all three platforms are shifting focus to become China’s “everyday app” for both goods and services. The investment bank estimates that the three platforms invested a combined RMB 25 billion (USD 3.5 billion) in instant retail in the second quarter, which is set to eat into profits this year.
Kenneth Fong, UBS Investment Bank’s head of Internet research in China, said he expects the instant retail industry, excluding food delivery, to grow by 30%, reaching a scale of RMB 760 billion (USD 106.4 billion) and accounting for 4–5% of China’s e-commerce market this year.
“The landscape is increasingly challenging, resembling a high-stakes ‘game of chicken,’ where the early investments of whichever player yields first could end up wasted. We expect this intense competition to continue at least through the [Singles’ Day] shopping festival in November,” said Fong in a recent note.
Fong added that the value generated by instant retail may fall short of what internet giants initially hoped for in the end, as shoppers will prioritize the best deals over platform loyalty.
Additionally, there is a risk of overinvesting in delivery infrastructure, since not all products require 30-minute delivery, he added.
Since the start of this year, China’s top market regulator has repeatedly pledged a sweeping crackdown on cutthroat competition in sectors including e-commerce and electric vehicles, warning that relentless price wars would hinder innovation.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.