Looming danger: When merchants move their advertising budgets out of Meituan

Wen | Dong Jie

Editor|Qiao Qian

How much disruption did the invasion of local life on Douyin cause to Meituan? Meituan's Q4 earnings report gave part of the answer.

Advertising revenue, which reflects traffic distribution and promotion capabilities, mainly from in-store business, decreased by 4.8% year-on-year to RMB7.74 billion. Despite the "backing" of the epidemic, Meituan's advertising revenue also increased by 1.4% in Q2, which is also close to the "stagnation" of the whole city.

This change is even more pronounced compared to commission income. Normally, the gap between Meituan's commission and advertising revenue growth rate is around 5%, and last year's Q2 figure was 2%, but by Q4, advertising was thrown out by 18 points by commission growth (13.6%).

This means that Douyin, which has a huge traffic advantage, has already had an impact on Meituan in grabbing the advertising budget of merchants.

Regarding the industry competition issues that are widely concerned by the outside world, Meituan CEO Wang Xing also said at the earnings conference, "Meituan's in-store business provides differentiated value for users and merchants, and this year will focus on creating synergies between takeaway and in-store, and using platform capabilities to consolidate existing advantages." ”

However, on the whole, Meituan's Q4 performance is still quite solid. The year-on-year revenue growth rate of more than 21.3% is the best performance among Internet giants except Pinduoduo. The operating loss was 730 million yuan, which was also a loss of 4.3 billion yuan from the same period last year, and the adjusted net profit also reached 2.96 billion yuan, which was a significant turnaround year-on-year.

Cost reduction and efficiency improvement were still firmly implemented in Q4. The growth rate of total operating cost of 15.07% was significantly lower than the growth rate of revenue; Selling expenses of $10,767 million were lower than the same period last year for three consecutive quarters.

However, Meituan CFO Chen Shaohui also revealed that with the recovery of consumption, Meituan will take business recovery and growth as the top priority of core local business, and "will gradually increase marketing investment in in-store and hotel business this year to further consolidate market share."

Due to the deterioration of the external competitive environment, the secondary market's confidence in Meituan has fallen seriously in the past few months. Year-to-date, Meituan's Hong Kong stock is down nearly 20%, the worst-performing weighted stock in the Hang Seng Technology Index outside JD.com and Kuaishou.

The better-than-expected earnings report also caused Meituan's US stock ADR to rise by more than 3% overnight, and as Tencent will pay dividends on the Meituan shares it holds, Meituan, which has exhausted its short-term profits, may be expected to usher in a wave of stock price repair.

Instant delivery that's hard to shake

Since Q2 last year, Meituan has begun to merge the two core main businesses of catering takeaway and in-store wine and hotel, which makes it impossible for the outside world to clearly see how much impact the epidemic has had on Meituan's core business.

However, Meituan Q4 still withstood the pressure. Core local commercial revenue was RMB43.47 billion, up 17.4% year-on-year, down from the 24.6% growth rate in Q3, but far exceeding market expectations.

Among them, the most outstanding performance is the delivery service, with quarterly revenue of 19.78 billion, a growth rate of 32%. After the pandemic was eased in December, the explosion of demand for takeaway and just-in-time retail (flash sales) was the main reason for the growth.

At the end of November last year, because it was impossible to predict how long the peak of infection in first-tier cities would end, Meituan's management only gave single-digit guidance for the growth of instant delivery orders, but in fact, Meituan's order volume in Q4 increased by 13.6% to 4.83 billion, with an average daily order volume of 53.6 million, an increase of 3.6 million from the third quarter.

Meituan catering takeaway order volume Data source: Longbridge Investment Research, Meituan financial report

Among them, the peak daily orders of flash sales exceeded 11 million in the fourth quarter, and UE was greatly optimized; The peak of food delivery orders in the fourth quarter exceeded 60 million orders (including flash sales), but it did not achieve the target of 60 million takeaway orders by the end of the year.

Due to the reduction of subsidies for distribution, coupled with the shortage of capacity during the epidemic, the increase in delivery prices and costs, the gross loss ratio of Meituan delivery in the quarter improved significantly year-on-year, reaching 14.2%. According to the calculation of Dolphin Investment Research, the gross loss of Q4 Meituan's single order delivery is about 0.5 yuan, and the gross profit of delivery will continue to improve in the future, and it is not impossible to draw a flat or even a small profit.

The significant turnaround in new business was key to Meituan's turnaround in adjusted net profit in the quarter.

Q4 Meituan's new business revenue was 16.66 billion, slowing down to 33.4% from the previous quarter, considering the impact of the epidemic and poor performance, the decline in growth rate is understandable. The loss of new business in the quarter was further narrowed to 6.37 billion, the loss ratio dropped to 38%, and the loss for the whole year was 28.38 billion, a significant improvement of 50% year-on-year.

In the quarter, the commission income of new business (mainly contributed by Meituan Youxuan) was 300 million, down 32% year-on-year, and Meituan's preferred revenue has entered a stable period after continuous city closure and contraction, and the gradual replacement of high-tier cities with self-operated grocery shopping.

The main revenue of the new business is other services and sales revenue, which is mainly speculated to come from Meituan Grocery Shopping. In this item, Meituan achieved revenue of 16.33 billion, a year-on-year increase of 36.1%. As a new business that also benefited from the epidemic, according to media reports, Meituan Grocery had made a breakeven in the fourth quarter of last year. However, with the end of the epidemic, the unit volume tends to stabilize, coupled with the expansion of new cities, Meituan's UE should continue to fluctuate in the future.

The impact of the wine hotel in the store appeared

The growth of Meituan's Q4 core local business revenue came more from delivery services. If you look closely at commissions, especially the revenue growth rate of advertising and marketing services, it is not optimistic.

Although Meituan's management stressed at the earnings conference that this is due to the impact of the epidemic and the reduction of merchants' willingness to pay, Douyin's diversion of the advertising budget of local life merchants is an indisputable fact.

In the fourth quarter, Meituan's commission income was 14.6 billion, a year-on-year increase of 13.7%, and the growth rate basically matched the growth of orders. However, advertising and marketing revenue (mainly from in-store and wine hotels) performed quite poorly, with revenue of only 7.74 billion yuan, down 4.8% year-on-year, and Meituan's growth rate in this area was 1.4% in Q2, which was also the national lockdown.

Changes in Meituan's advertising and marketing revenue Source: Longbridge Investment Research, Meituan Financial Report

Previously, many merchants said that due to the competitive pressure of Douyin, since Q4 last year, Meituan has begun to rebate commissions for some merchants and give certain discounts on advertising prices, which is also reflected in the financial report.

Due to the expansion of competition, Meituan's marketing expenses in Q4 reached 10.77 billion, exceeding market expectations of 8.9 billion, a year-on-year increase of 22.7%, exceeding the revenue growth rate, which also partially diluted the operating profit of Meituan's core business - Q4 operating margin in this area was 17%, compared with 22% and 20% in the previous two quarters.

Because of its adherence to "reducing costs and increasing efficiency", Meituan maintained considerable restraint last year on the impact of Douyin's local life.

A middle manager of Meituan told 36Kr that "the focus of the in-store business last year was mainly on refined upgrades, such as improving the matching between algorithms and users, expanding the scale of users, and expanding the sinking market."

Some Meituan employees said that in fact, the internal has long expected that Douyin will definitely do local life, but due to the conversion efficiency brought by Douyin live broadcast in the early days, and local life is a "drudgery" that seems to have no low barriers, Meituan's internal vigilance has not been enough.

"And excluding the impact of the epidemic, Meituan's growth rate in stores in the first three quarters did not decline," the above person said, which also made Meituan spend more time on realizing the threat of Douyin.

But since this year, Meituan's assault on Douyin has become wary. As early as February, the operation of in-store catering has begun to visit intensively across the country to collect feedback from merchants, especially in the sinking market where Douyin's market share is increasing.

With the recovery of consumption, Meituan's rebound in stores is quite rapid.

Wang Xing revealed at the earnings conference that Meituan's GTV growth rate reached 30% in February, and the growth rate will be faster in March. According to a survey by a number of brokerages, Meituan's GTV and operating margin in Q1 this year exceeded expectations, and GTV in the first three weeks of March increased by 75%.

The recovery of the arrival has eased Meituan's nervousness, but Douyin's rapid offensive will not stop, and Meituan must keep up with the pace in terms of resource investment of merchants and users.