China's internet darlings seek growth after zero-Covid

China’s internet darlings seek growth after zero-Covid

Two Chinese internet companies that have emerged as winning companies during the pandemic are adjusting to renewed competition as the country begins to back away from its zero-Covid policy.

Food delivery group Meituan and discount shopping app Pinduoduo made a combined profit of Rmb11.8 billion ($1.7 billion) in the three months to the end of September, as shoppers turned to spending on food delivery and bulk purchases of basic consumer goods.

Meituan and Pinduoduo also increased their sales by 28% and 65% year-on-year, respectively, beating the country’s tech giants. Over the same period, Tencent’s revenue declined while Alibaba’s rose only 3%.

But as Beijing this week announced far-reaching relaxations to President Xi Jinping’s controversial zero Covid restrictions, the two companies are looking for alternative revenue streams.

“They are the two highest quality companies in the Chinese internet market,” said Robin Zhu, analyst at AB Bernstein. “They’ve both been nimble in the face of Shanghai’s lockdown,” referring to China’s biggest city’s weeks-long shutdown in the spring. He noted that both platforms were quick to implement ways to facilitate deliveries to residents stuck at home, such as group buying services for residents of the same building.

Meituan and Pinduoduo have also benefited from Beijing’s campaign to break the grip of e-commerce giant Alibaba, which has forced some merchants to sign up exclusively to its popular shopping platforms Taobao and Tmall. In the three months to the end of September, Pinduoduo’s online marketing services revenue, which includes merchant advertising spend, reached Rmb 28.4 billion, a 58% year-on-year increase. former.

Meituan was able to raise prices as competitors retreated and food delivery expenses soared. “Meituan’s profitability has improved during the pandemic as people have been unable to travel or leave their homes,” said Li Chengdong, head of e-commerce think tank Haitun. “They spent more money on local services such as food delivery.”

“The pandemic has undermined competition in the market,” said a former employee of Meituan, who left the company following a wave of job cuts in April. “As long as the business can deliver the food despite the restrictions, it doesn’t need to have competitive prices or better products.”

Meituan’s pre-eminence may prove fleeting. Beijing’s regulatory crackdown on anti-competitive behavior has opened the door to new players funded by deep-pocketed rivals.

On Monday, Douyin, the Chinese version of social media app TikTok, announced a partnership with three companies to provide food delivery services, putting it in direct competition with Meituan.

Li said the move meant restaurants would likely shift some advertising spend from Meituan to Douyin.

Alibaba is also poised to fight for market share, having cut spending in recent months. “Alibaba recalled its price war and incentive campaign to expand its food delivery business this year, which enabled Meituan to ease subsidies,” Zhu said.

Even so, Meituan’s diverse stable of businesses means the company could still benefit from the reopening of China. Zero-Covid checks have hurt the hotel and travel booking segment, its most profitable business before the pandemic.

Both Meituan and Pinduoduo are trying to secure future revenue streams, the former through its Yelp-like restaurant and travel directory service and the latter through Temu, a Shein-like fast fashion app targeting Western shoppers.

Analysts said Meituan and Pinduoduo were able to take decisive action putting them ahead of the competition during the shutdowns as the pair was still led by the founder.

Meituan’s Wang Xing still leads the company as general manager, and although Pinduoduo’s Colin Huang has officially stepped down as CEO, he is still the largest shareholder and continues to play a pivotal role in guiding the company. company, according to two people close to Pinduoduo. .

Insiders said Meituan has executed significant cost and personnel cuts, which have helped its bottom line. In the results of an April industry survey, China’s powerful cyberspace administration said tech employment remained stable, despite its fierce regulatory campaign and falling stock prices.

But after presenting good job prospects to the regulator, “Meituan started laying off workers,” the former employee said. “The cuts have been made worse because the usual exodus of staff after the distribution of Chinese New Year bonuses has not happened.”

Pinduoduo and Meituan did not respond to requests for comment.

Despite Meituan’s growth and profitability, investors have been rattled by major shareholder Tencent’s decision to divest its stake in the group, responding to pressure from Beijing to downsize its internet empire in China, according to reports. people close to the decision.

Hong Kong-listed Meituan’s share price has fallen more than 20% in the past 12 months to HK$189 ($24), while Pinduoduo’s Nasdaq stock has risen nearly 50% to reach $91.

Pinduoduo has benefited as shoppers stuck at home have turned to looking for bargains on its hit app. But after announcing an exceptional quarter of accelerating sales growth and increasing profits, senior funder Neil Shen of Sequoia Capital China, considered the country’s top venture capitalist, decided to leave his board. administration and collect a portion of the fund’s earnings.

Last month, Shen said he was stepping down “to focus on my other interests and commitments.” Entities affiliated with Sequoia requested to sell up to $390 million worth of Pinduoduo stock on the same day.

The departure comes as Pinduoduo ventures into the territory of another Sequoia-backed company, Shein, by launching fast fashion venture Temu in September, targeting the insatiable appetite for cheap clothes among consumers across the region. Generation Z in the United States. The group lavished new buyers with favorable offers and incentives for apparel manufacturers to sign up.

“Pinduoduo will have to invest a lot to enter this field,” Zhu said. “But the upside potential is huge, especially as U.S. consumers turn to cheaper retailers as the country heads into a weaker economy.”

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