Meituan dimensionality reduction

Author|Eastland

Head Image|Visual China

On March 24, 2023, Meituan (3690. HK) released its Q4 and full year 2022 results. According to the announcement, Meituan's revenue in Q4 2022 will be 60.1 billion, a year-on-year increase of 21.4%; Full-year revenue was RMB220 billion, EBITDA (EBITDA) was RMB9.72 billion (negative RMB9.69 billion in 2021).

In 2019, Meituan's EBITDA was 7.25 billion, and in 2020, the EBITDA was still 4.74 billion. In 2021, multiple unfavorable factors superimposed, and Meituan finally suffered a huge loss. The epidemic has not yet ended in 2022, Meituan's EBITDA has reached a new high, and it seems that the probability of achieving better performance in the recovery is greater.

Since the Q2 2022 financial report, Meituan has changed its performance disclosure structure, confirming the speculation that "delivery services have been losing money". #值得玩味 #

Drivers of revenue growth

In 2022, Meituan's revenue reached 220 billion, a year-on-year increase of 22.8%. Although well below the pre-IPO triple-digit growth rate, double-digit growth is very "rare" among today's Internet companies.

What is driving Meituan's revenue growth?

1) Redistricting

Starting from the second quarter of 2022, Meituan has divided its business into two segments: "core local business" (referred to as "local business") and "new business":

Local businesses include takeaway, in-store, wine hotels, Meituan flash sales, homestays, and transportation ticketing.

New businesses include Meituan Youxuan, Meituan Grocery Shopping, Catering Supply Chain (Kuaide), ride-hailing, shared bicycles, power banks, restaurant management systems, etc.

After the redivision, Meituan's business structure is relatively stable, and the ratio of "local business" to "new business" revenue is roughly maintained at 3:1.

In Q1 2022, local business revenue will be 34.2 billion, accounting for 74%, and new business revenue will be 12.1 billion, accounting for 26%;

In Q4 2022, local business revenue will be RMB43.5 billion, accounting for 72%, and new business revenue will be RMB16.7 billion, accounting for 28%;

The new division reflects Meituan's business strategy and is consistent with resource allocation. There is also a motivation to separate money-making businesses from money-burning businesses, increasing transparency.

In terms of contribution to revenue growth, local business is significantly larger than new business. Except for Q2 2022, new business performed the best, contributing 58% to revenue growth. In other quarters, local life contributed more than 60% to revenue growth.

2) Core local business

In the local commerce segment, the top businesses by revenue are distribution, commissions, and online marketing. Delivery is a labor-intensive offline service, the commission is a "commission", and online marketing earns Internet advertising fees.

In Q1 2021, the distribution revenue was 12.9 billion, the commission income was 9.8 billion, and the online marketing revenue was 5.7 billion.

In Q3 2022, the three major local commercial businesses "peaked" at the same time: distribution revenue of 20.1 billion, commission income of 16.1 billion, and online marketing revenue of 8.6 billion.

In Q4 2022, distribution and commission fell back to 19.8 billion and 14.6 billion respectively, and online marketing revenue was 7.7 billion, down 390 million year-on-year.

In Q4 2022, distribution revenue was RMB19.8 billion, accounting for 45.5% of local commercial revenue, up 3.7 percentage points from Q1; commission income was RMB14.6 billion, accounting for 33.7% of local commercial revenue, down 1.5 percentage points from Q1; and online marketing revenue was RMB7.7 billion, accounting for 17.8% of local commercial revenue, down 2.8 percentage points from the beginning of the year.

In addition to Q1 2022, distribution was the main driver of revenue growth. In Q4 2022, distribution contributed 74% to the growth of local commercial revenue, 27% of commission and negative year-on-year growth in online marketing.

3) The first driver is distribution

In 2022, the core local business revenue will be 160.76 billion, a year-on-year increase of 17.6%; New business revenue was RMB59.2 billion, a year-on-year increase of 39.3%. The growth rate of new business is 2.2 times that of local business, but the base is small, contributing 41% to revenue growth. Local businesses contributed 59% to revenue growth.

In the local commercial sector in 2022, distribution revenue was RMB70.1 billion, a year-on-year increase of 22.6%, and commission income was RMB55.1 billion, a year-on-year increase of 14.9%.

In 2022, the distribution business increased revenue by 12.9 billion yuan, contributing 31.6% to the revenue growth; Commission increased by $7.1 billion, contributing 17.5% to revenue growth. New business increased revenue by RMB16.7 billion, contributing 41% to revenue growth.

However, "new business" is a collection of multiple businesses, and the first driving force for Meituan's revenue growth is distribution.

The "mystery" of disclosing the cost of distribution revenue

The delivery business is the cornerstone of Meituan Building, and according to the new division method, delivery transactions include food and beverage delivery and Meituan flash delivery.

1) 18 billion deliveries throughout the year

According to Meituan's definition, users who have used Meituan's delivery service in the past 12 months are "transaction users", which are essentially "annual active users".

At the end of the first quarter of 2021, the distribution business had 570 million annual active users and 30.5 per capita transactions in the past 12 months.

At the end of the first quarter of 2022, the annual active users of the distribution business increased to 690 million, and the number of transactions per capita in the past 12 months was 37.2.

At the end of the fourth quarter of 2022, the annual active users of the distribution business fell back to 680 million, and the per capita transaction in the past 12 months was 40.8.

In 2022, the number of delivery users hovered at 700 million, and the number of transactions per capita maintained growth, with 17.7 billion deliveries for the whole year, a year-on-year increase of 14%.

In Q2 2022, Meituan began to disclose revenue according to the new division method. Q1 financial report disclosed that takeaway delivery revenue was 13.5 billion, according to the full year and Q2, Q3, Q4 data, Q1 delivery business revenue was 14.2 billion. Then, Meituan's flash delivery revenue in Q1 2022 will be about 670 million yuan (about 700 million in Q1 2021), accounting for 4.7% of the delivery business revenue (5.4% in Q1 2021).

According to the 2022 Q4 financial report, Meituan Flash delivered a peak of daily orders of more than 11 million in December.

2) Delivery is a "loss-making business"

The mystery of Meituan's change of disclosure method is to tell the outside world: the delivery service is a loss!

The highest loss rate was in Q3 2021, with distribution service revenue of 15.4 billion, cost of 20 billion, and a loss rate of 30%, with a loss of 0.93 yuan per transaction (5 billion deliveries in Q3).

Entering 2022, things are improving. There were 4.83 billion deliveries in Q4, with revenue of 19.8 billion, costs of 22.2 billion, and a loss rate of 12.3% (the loss rate in Q4 2021 was 28.8%).

Tiger Sniff published "Dismantling Meituan" on April 16, 2020, when Meituan disclosed that the "takeaway commission" included delivery fees (mainly paid to riders).

For example, in 2019, commission income was 49.6 billion and rider costs were 41 billion, accounting for about 83%. The outside world doubts that Meituan's commission is too high, and catering companies cannot afford it. But Meituan received a so-called "commission" of 5.96 yuan, of which 4.71 yuan was paid to the rider, and Meituan left 0.98 yuan, with a commission rate of 2.2% (the amount of each takeaway transaction in 2019 was 45 yuan).

In 2021, there will be 15.5 billion deliveries, 57.1 billion in revenue, 72.1 billion in related costs, a gross loss of 15 billion, and a loss of 0.97 yuan per delivery!

In 2022, there will be 17.7 billion deliveries, revenue of 70.1 billion, related costs of 80.2 billion, gross loss of 10.1 billion, and a loss of 0.57 yuan per delivery, a year-on-year decrease of 41%.

"Meituan Logic" is established

1) Send a sum to pay a loss, why should you send it

The takeaway business gives a loss one by one, but it brings considerable traffic, and the user is very purposeful - to find good food.

The high-frequency, high-quality traffic related to takeout nourishes Meituan's in-store and online marketing.

Take Q3 2022 as an example: distribution revenue of 20.1 billion, cost of 22.6 billion, loss of 2.5 billion; Commission income was RMB16.1 billion, online marketing (i.e. advertising expenses) and other revenues were RMB10.1 billion, non-distribution revenue and costs were RMB26.2 billion and RMB14.4 billion, respectively, with a surplus of RMB16.1 billion.

For the full year of 2022, commission revenue (mainly from store visits) was RMB55.1 billion, online marketing and other revenue was RMB35.6 billion, totaling RMB90.7 billion, and local commercial segment operating profit reached RMB29.5 billion.

Roughly speaking: lose 10 billion to deliver food, collect 90 billion commissions, advertising fees, and earn 30 billion profits.

In 2022, Meituan's "new business" will have an operating loss of 28.4 billion, and without 18 billion takeaways, there will be no capital to explore the "second growth curve", so "send a loss and a loss" should also be sent.

2) Get rid of huge losses

In the first fiscal year after listing (2019), Meituan achieved a turnaround, with operating profit and EBITDA of RMB2.68 billion and RMB7.25 billion, respectively.

In 2020, despite the impact of the epidemic, Meituan remained profitable, with operating profit and EBITDA of 4.3 billion and 4.7 billion respectively.

In 2021, Meituan suffered a huge loss of 23.1 billion yuan and an EBITDA of negative 9.7 billion yuan;

In 2022, Meituan's loss was reduced to 5.8 billion yuan, and its EBITDA was positive 9.7 billion yuan.

In the past three years, Meituan has faced multiple crises.

First, the public opinion environment has taken a sharp turn, demanding lower commissions and improved rider welfare. If the losses of the takeaway business of "losing money and making money" are infinitely amplified, the "Meituan model" will completely "collapse";

The second is the impact of the epidemic and the lockdown on takeaway business. On the one hand, the demand for takeaway food by users has increased; On the other hand, a large number of riders were also locked at home and unable to take orders, and Meituan's delivery performance ability was facing challenges;

Third, the new business "burns money", and if it is terminated, the previous achievements will be lost.

In 2022, Meituan successfully reduced the loss rate of its distribution business by 40%, increased its commission and advertising revenue by 14% with high gross profit, and made a local commercial profit of nearly 30 billion. With the new business "burned" RMB28.4 billion, Meituan's net loss was RMB6.7 billion (down 72% year-on-year) and EBITDA reached RMB9.7 billion (a record high). It shows that the "Meituan logic" still holds.

"Dimensionality reduction" for yourself

The term "dimensionality reduction strike" has been used rottenly, and no one has used it correctly. People think of "higher civilization fighting lower civilization" or "reducing the enemy from three to two dimensions".

The original intention of the original book is to first reduce their own dimension, such as creatures in four-dimensional space actively reduce themselves to "three-dimensional creatures", and then try to reduce the four-dimensional space they share with the enemy to three-dimensional, so that the enemy cannot survive.

In 2003, eBay, which had 3.5 million users, had a 90% market share in China and was allied with multinational giant eBay. In order to block the newly established Taobao, eBay bought out three major portals (Sina, Sohu, Netease), and also came up with terms such as "want Taobao, go to eBay" and put it on Baidu. #这不叫降维打击 #

Taobao's "killing move" against powerful opponents is to declare it free. It is to transform itself from a "three-dimensional creature" that provides services for a fee to a "two-dimensional creature" that provides services for free, and then "two-dimensional" China's e-commerce rivers and lakes. eBay could not survive in two-dimensional space and eventually lost.

Launching a price war is the most common "dimensionality reduction". But if it is you who dies first after dimensionality reduction, it is suicide rather than a "dimensionality reduction blow".

An efficient delivery network is Meituan's core competency – communicating the needs of 700 million consumers to 9 million merchants, and dispatching one of millions of riders to deliver within 1 hour at a cost of only a few dollars.

If a user books a hotel on Ctrip, all Ctrip has to do is wait to settle the commission. And the user ordered a takeaway, and Meituan's work has just begun: notifying the catering to start production, selecting riders and planning the pickup and delivery route, monitoring everyone's progress, answering customer reminders... Ctrip charges a commission of tens of yuan per order, and the workload is ten times that of Ctrip's Meituan only one dollar.

Meituan has turned itself into a "two-dimensional creature", "losing small money" to deliver food to get traffic and "make a lot of money". "Three-dimensional biology" to achieve the scale of Meituan takeaway, the loss will be "astronomical".

Delivering food at a loss is a typical "dimensionality reduction blow".

*The above analysis is for reference only and does not constitute any investment advice