Top 3 reasons China’s online food delivery apps are worth more than their U.S. counterparts
Rhea Liu
The young American entrepreneur Tony Xu founded DashDoor two years ago from his dorm room at Stanford University. The fast food delivery app is today worth USD 600 million and is listed as one of the next billion-dollar unicorns by Forbes and the New York Times.
An almost identical story happened a little bit earlier in China before DashDoor rose to fame in the U.S. In 2009, Zhang Xuhao, a then graduate student at Shanghai’s Jiaotong University — a top 10 Chinese university — founded online food delivery platform Ele.me.
Ele.me raised USD 630 million in August, pushing its valuation to USD three billion, heating up the competition in China’s food delivery business. Its major competitor the Groupon-like website Meituan, merged with Dianping, the Chinese Yelp, earlier this month for a combined valuation of USD 15 billion, more than seven times the market cap of the already-listed American online delivery initiator GrubHub as of Oct. 29th.
With similar histories and business models, how is it possible China’s Ele.me, Meituan and Dianping are able to have 5 times the valuation of their American counterparts?
AllChinaTech looks into the Chinese online food delivery business to offer insight.
I. A vast and accessible market
China’s food delivery sector saw revenues of RMB 835.8 billion (USD 132.7 billion) in 2014. Unsurprisingly, China has a bigger market because of its sizeable population. New York City, which has the highest density of people in the U.S., is half as crowded as the northern Chinese city of Shenyang.
But population and density provide only the foundation for a booming market. China’s significant smartphone penetration rate is also a key reason for prosperity in China’s online food delivery sector.
A report by eMarketer suggests China will have 525 million smartphone users by the end of 2015, accounting for 28.3% of global smartphone users. Smartphone manufacturers like Xiaomi now offer smartphones below RMB 1,000 (USD 159).
China will have 525.8 million smartphone users in 2015, 28.3% of the smartphone users on the planet, eMarket predicts.
According to China’s Ministry of Industry and Information Technology, in September 2015, China had 302 million 4G users. Data in China is now as cheap as RMB 59 for 3 gigabytes thanks to virtual mobile network operators bringing down costs and making Internet affordable for even working class citizens.
“Mobile Internet is pushing the development of China’s mobile applications,” China’s 2015 Mobile Internet Development Report states. An earlier report by IDC also suggests commercializing 4G services could effectively break the limits of bandwidth and set a foundation for China’s mobile application market.
Compared with the U.S. market which sees many consumers reluctant to upgrade to 4G or smartphones because of affordability, the Chinese market, without doubt, presents more of a chance for internet-based tech companies.
II. Fierce competition
If you go at about noon to the Wangjing Soho office towers in northern Beijing, where many startups reside, startup reps are handing out all kinds of freebies from fresh fruit to toilet paper and even grass-shaped head decorations.
The freebies are treated as a form of direct promotion by startups. Freebies and subsidies are a symbol of the intensive competition taking place in the on-demand economy of China, among which food delivery is one of the most brutal battlefields. Famous Chinese venture capitalist Zhou Wei said at a conference earlier, at the peak of growth for on-demand services, over 800 on-demand startups were competing against each other at the same time.
Though few of these cash-burning startups survived the first few rounds of promotions, the fierce competition has made one difference: consumers have gotten used to using online services like food delivery. Bombarded by real cash incentives from so many parties, consumers have been exposed to the convenience and benefits of Internet service, and have become increasingly open to new services at the same time.
For instance, Ele.me distributed 200 thousand free lunches to lure more white-collar users after receiving USD 80 million in a funding round. Users often find it too much trouble to download an app and register an account but are easily swayed in return for a free lunch. Once users begin to use the service, they very likely become spoiled by the convenience of door-to-door delivery.
“We’re willing to burn cash. It’s okay because once users develop the habit [of using the applications], they’ll come back,” said Kathy Xu, Founder and President of Capital Today, which has invested in JD.com and Dianping.
Another important aspect is that fierce competition in China forces companies to evolve very fast. Startups have to constantly improve their products and services for fear of losing users to competitors. Ele.me’s iOS app is already on its fifth version and sees updates on average about every 20 days. An update on June 30th read, “features optimized to your liking because we listen.”
III. Business based on compounds
In contrast with GrubHub or DoorDash the pioneers of the online food delivery business, Chinese players have broader interests.
Meituan, a leading player in the area, first emerged as China’s Groupon, but soon started a food delivery business in November 2013 in response to Ele.me gaining in popularity. A significant advantage for Meituan was that its existing business registrations had huge potential overlap for a food delivery business. At the same time, it had already established partnerships with many local food outlets, saving it a lot of trouble compared with those starting from scratch.
“Because of our group buying business, we had connections with local restaurants and were able to make use of a synergy effect, establishing our food delivery business at the same time,” Wang Huiwen, the person responsible for Meituan’s food delivery business said in an interview in 2014 when they first started the business.
Amazon’s new Prime Now food delivery service and Uber’s newly launched UberEATS are following the same strategy. With an established user pool and platform, these businesses are always a threat when they enter a new area.
Pure food tech companies in China reply upon their alliances for the resources they need to wage war. Ele.me, which only focuses on food deliveries, is backed by Tencent. The support flowing from Tencent and now Dianping, which just merged with Meituan and is still a board member at Ele.me, is more than just cash. Data and traffic flowing from Tencent and Dianping ensure Ele.me won’t be left behind by industry magnate Baidu, which also has large ambitions for the food delivery business.
With Alibaba backing up Meituan, Tencent backing up Ele.me and Baidu operating its own food delivery service, key players in China’s food delivery service forge ahead competing against each other in groups but also creating a vast trillion-dollar market.
(Top photo from Baidu)
Originally published at www.allchinatech.com.
Rhea Liu is a writer at AllChinaTech. She acquired a Master of Science in Communication Studies from Boston University and a Bachelor of Arts in English Literature and Linguistics from Beijing Foreign Studies University. She also co-founded a podcast featuring Chinese post-90 generation lifestyle and intercultural communication. You can follow her on Twitter @yushan_l.
