The economic principles of small profit takeaways

Introduction to the stone: Is the commission rate of the takeaway platform high in the end? How low does the commission rate really have to be? How profitable is takeout? Where does all the money earned go?

1

Meituan has recently been in the midst of a series of controversies.

Not long ago, it released its full-year financial report for 2021. In each business, although the Meituan in-store hotel and tourism business has been seriously affected by the epidemic, its overall performance is acceptable, basically maintaining a normal revenue level; new businesses such as community e-commerce continue to maintain large-scale investment due to the construction of a national warehousing and logistics system; and the catering takeaway service, as a basic business, is in a state of low profit.

In this annual report, Meituan for the first time re-decomposed the commission income of the takeaway business. According to the financial report, in 2021, Meituan's takeaway commission revenue (technical service fee) was 28.5 billion yuan, compared with the transaction amount of 702.1 billion yuan for the whole year, the commission realization rate (take rate, takeaway commission income from GMV) was only 4.1%. This is basically maintained at the level of the past three years in 2018-2020, without much change.

Although meituan's takeaway business once ushered in breakeven due to the rise in gross profit margin in 2019, there is still a big gap compared with Wang Xing's idea of "an average of 100 million takeaway orders per day in the future, and each earns 1 yuan". Meituan takeaway business has been carried out for ten years, the current average profit is less than 4 corners, according to this time schedule, in order to achieve the goal of 1 yuan per unit, it may take another ten years.

But for the low-profit status of meituan takeaway, the public does not seem to recognize it, especially for the merchants and riders to talk to the audience is not a minority, so where did the money go?

2

According to the financial report, Meituan's catering takeaway revenue is mainly composed of three parts: catering takeaway delivery services, commissions and online marketing services, with a total of 96.3 billion yuan. Among them, the revenue of catering takeaway delivery services is 54.2 billion yuan, accounting for more than 50% of the overall revenue, but matching this part of the revenue, the actual performance cost paid by Meituan to the riders is as high as 68.2 billion yuan, which means that the cost of Meituan for direct subsidies to riders throughout the year is as high as 14 billion yuan.

When we studied grubhub, a U.S. takeaway platform, we found that both the monetization rate and the gross profit margin were much higher than those of Meituan Takeaway. Specifically, the overall rate of domestic first-line takeaway platforms remains around 20%, while Grubhub only charges about 20% of the delivery service fee, and the basic commission fee is 12.5%, if the merchant wants to promote, it must also pay 0-17.5% of the advertising rate of four grades, which together is much higher than the overall domestic rate.

A Chinese netizen said that at the beginning of the epidemic, he ordered takeaway in the United States for 5 consecutive months, which was 50% more expensive than going to the same store to eat. American catering consulting agency Targeted has done an analysis of the restaurant's dine-in and takeaway cost structure, dine-in orders mainly include staple foods and beverages, a total of $30, the gross profit of the merchant is as high as $20.75; while the takeaway order assumes that the drink is not ordered, the consumption is $25, and then deducts the cost of food and "delivery fee + packaging fee", and the gross profit of the merchant is reduced to $9.63. Therefore, some foreign merchants prefer to choose to bear the fulfillment cost of delivering goods themselves.

The delivery methods of Meituan takeaway are also divided into 1P mode (Meituan delivery) and 3P mode (non-Meituan delivery), but for most of the small and medium-sized merchants on Meituan takeaway, it is not realistic to establish a delivery team, because the cost brought by this is likely to be much higher than the delivery service fee charged by the platform, so they mostly use the 1P mode delivered by Meituan. According to statistics, on the Meituan takeaway platform, the 1P model (Meituan delivery) and the 3P model (non-Meituan delivery) account for 67% and 33% of the total takeaway transaction volume, respectively.

Under the 1P model of Meituan to undertake delivery services, it is difficult to charge merchants and users excessive delivery service fees, and it is also necessary to subsidize the corresponding delivery-related fees and provide consumer incentives to stimulate consumption. This natural cost structure of catering takeaway service e-commerce determines the low-profit state of its business model.

Imagine that if the profit margin of the takeaway platform is too high, on the one hand, the merchants are miserable, and more importantly, the price increase will lead to the cost eventually shifting to the consumer side, which will eventually lead to the breakdown of the dynamic balance. Users, riders, merchants, and platforms will all fall into an unsustainable situation. Physical e-commerce platforms such as Alibaba, Pinduoduo, JD.com and Amazon are different from service e-commerce. They are at the fulfillment end, if the package is delivered by the platform, the merchant usually needs to first batch into the warehouse, pay the storage fee and packaging fee to the platform, etc., the platform can profit through this, and more merchants are willing to choose to ship in the warehouse.

Therefore, we need to abandon dualistic thinking when we look at systemic problems in order to see the truth of things. Although it is in a state of low profit, the user value, industrial value and social value created by Meituan takeaway cannot be ignored.

First of all, during the covid-19 epidemic, when people were restricted from going out due to home isolation, the home service provided by the Meituan takeaway platform was widely used by users, which greatly facilitated people's lives.

Secondly, because the epidemic has led to a significant reduction in the number of customers coming to the store of many offline catering enterprises, orders from Meituan takeaway have become the most important source for them to maintain their operations.

Third, during the epidemic, a large number of traditional industries and offline operations were affected, and meituan takeaway riders became a very important employment channel. It is reported that in 2021 alone, more than 5.27 million riders will earn income through the Meituan platform.

3

In the case of maintaining a low commission rate, it is not easy for Meituan to ensure sufficient delivery supply and take into account the needs of merchants without harming the service experience of the majority of users.

The reality is that the amount of each takeaway order of the US group is fixed, and there can only be a zero-sum game between the merchant, the rider and the user, and one party distributes more benefits, and the interests of the other two parties are bound to be damaged in the same order. This is a bit like the "impossible triangle" phenomenon often mentioned in the financial world. The "impossibility triangle" refers to the fact that it is impossible for a country to achieve free capital flows, the independence of monetary policy and the stability of exchange rates at the same time.

Although on the one hand, it is under greater operational pressure and on the other hand, it is under a lot of pressure from public opinion, but the US group still does its best to ensure the balance of interests of all parties to achieve overall optimization.

In May 2021, in order to actively respond to the government's call to help small and medium-sized merchants, it took the lead in promoting the reform of transparency of takeaway rates, actively optimized the platform charging model, and split the platform service fee of each order of merchants into two components: technical service fee and performance service fee, increasing transparency.

At the beginning of March this year, Meituan launched a phased support measure in 2022, mainly including six specific measures such as reducing commissions for difficult merchants in epidemic areas, capping commissions for small and medium-sized merchants in difficulty, and providing online services and tools for free. At the same time, after Meituan completed the exchange of merchant rates in all directly operated cities last year, this year it will also realize the rate replacement of merchants in agent cities across the country.

In addition to these direct assistance to small and medium-sized merchants, Meituan also deeply realizes that in order to completely change the zero-sum game situation between "merchants, riders and consumers", it is necessary to optimize and iterate on the business model of the platform from a deep level. Among them, the most effective way is to use meituan's current core resources and capabilities to develop new business to obtain better profitability, and then feed back to all participants in the takeaway ecosystem.

First of all, Meituan is committed to fully releasing the value of the world's largest same-city distribution network it has invested huge amounts of money to build through the strategic upgrade from "catering to home" to "30 minutes to home", so that riders can obtain higher freight revenue and get more commission income.

When the rider's own freight income increases and the platform is no longer needed for subsidies, when Meituan obtains more generous commission income through high-margin business, it can subsidize these funds to catering merchants in those low-margin areas, so as to achieve a higher health of the takeaway ecology.

At present, in addition to catering takeaway, Meituan has begun to exert efforts in the field of instant retail such as drugs, flowers, daily necessities, brand cosmetics and mobile phones, promoting more and more consumers to experience instant retail services within the same city, thus bringing new revenue and profit points. For example, just recently, Meituan and Xiaomi Home reached a strategic cooperation, covering more than 3,000 Xiaomi Homes in 276 cities such as Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu and Kunming, based on the Meituan platform, providing instant purchase services including mobile phones, smart wearables, smart homes and personal care and other categories of goods "delivered to home in the fastest 30 minutes". Consumers only need to search for "Xiaomi Home" through the Meituan or Meituan takeaway App to achieve "smart life, on call".

Secondly, Meituan put forward the "retail + technology" strategy in 2021 to vigorously develop physical e-commerce and commodity retail e-commerce business, which will give the users and traffic created by the takeaway business the opportunity to monetize again.

Around the strategy, Meituan is continuing to increase investment in technology, commodity supply chain and national warehouse logistics to provide better infrastructure support for the development of new businesses such as e-commerce. With the development of these new businesses, the profits they create in the future can also be fed back into the takeaway ecology, and eventually form an overall strategic synergy of using the takeaway low gross profit business to drive the high gross profit business of e-commerce.

Because Meituan's e-commerce business outside of local life services is still in the investment period, it has suffered serious losses and cannot feed the takeaway business well in the short term. But in the long run, synergy between the two will have the potential to create greater value. The stronger the ability and the greater the responsibility, the better policy inclination can be provided for those small and medium-sized businesses that have difficulties in operating.

Therefore, in the current situation of small profits in the main business and the overall huge loss, how much value the takeaway platform can play in the future still needs more patience and longer time to judge.