“Anything but sane”? Why Delivery Hero is wrong about China’s delivery market

Berlin-based takeout ordering platform Delivery Hero announced on last Wednesday that they would discontinue their business in China, saying irrational competition led to a market bubble in the country.

This international takeout giant launched its Chinese business unit in 2012, targeting the country’s white-collar market. Business has since expanded to 20 cities with thousands of orders each day, but it has increasingly been confronted with fierce competition from local rivals, including Alibaba-backed Ele.me, Tencent-backed Meituan and Baidu-backed Baidu Waimai.

“China has become anything but sane with competitors flooding the markets with free food to users without charging commission from restaurants,” said Niklas Östberg, CEO of Delivery Hero, in a statement about Delivery Hero’s exit from China.

But is China’s food-ordering and delivery market really insane? Based on AllChinaTech’s observations of the market, this may no longer be the case.

A vast market with great potential

First and foremost, China does have a massive online food ordering market. Demand is strong. According to Chinese market research company Analysys, the transaction volume of China’s online takeout market reached RMB 45.78 billion (USD seven billion) in 2015, and the market will continue to have strong growth momentum, reaching RMB 245.5 billion in 2018.

The primary reason for the huge market in China is the country’s massive population, but population only paves the way to a booming market. China’s large number of smartphone users also plays a key role in the prosperity of China’s online food delivery sector.

According to the 37th semi-annual report released by the China National Network Information Centre, China now has 688 million web users, giving the country an Internet penetration rate of 50.3%. It’s also noteworthy that China’s population of mobile web users reached 620 million in 2015, covering 90.1% of the total population of Chinese web users. The fast-developing Internet infrastructure in China is making it possible to seamlessly connect businesses and consumers online.

Additionally, because of a history of poor service experience in China, Chinese consumers were early-adopters of online services compared to American users. The better quality of service experienced on e-commerce platforms in China as opposed to brick-and-mortar locations has turned Chinese consumers into loyal online users.

Robin Li, CEO of Baidu, said in an interview with Re/code that China’s market economy had only existed for 30 years with no strong offline business, and that the Internet would help to provide better efficiency.

Li is shifting the company’s focus from Internet search provider to Online-to-Offline (O2O) business, positioning Baidu as the bridge connecting China’s Internet with offline services.

Fierce price war? It’s over

China’s three takeout giants, Meituan, Ele.me and Baidu Waimai, essentially dominate the food ordering and delivery market now.

An aggressive price war originally happened when startups entering the market tried to foster the consumer-habit of using online food delivery services. Discounts, coupons and even free services were all used to scale business quickly.

According to iyiou, a Chinese tech blog, last year Meituan offered subsidies amounting to RMB 200 million monthly while Ele.me offered RMB 100 million in subsidies per month. Baidu Waimai discounted about six RMB on average from every order it delivered. But such massive subsidies lasted only three or four months. In a report from Chinese news portal Sohu in January, a source from Baidu Waimai said the massive subsidies weren’t sustainable and the price war was coming to an end.

With users now aware of the convenience of online food ordering and delivery, freebies and subsidies provided for promotion won’t be offered at the same level in established markets.

The age of “competitors flooding the markets with free food to users without charging commission from restaurants”, as Östberg said, seems to be coming to an end.

Exit a good choice?

Delivery Hero’s description of the Chinese market is a bit inaccurate, but its decision to exit may be the right choice. The company doesn’t stand much of a chance with the current size of its market share.

Chinese competitors have invested heavily in the market. Baidu CEO Li confirmed that Baidu Waimai raised USD 250 million in financing that will be used to fund logistics. Ele.me also secured USD 1.25 billion from Alibaba, according to Caixin.com, and Tencent News reported that Meituan landed USD 2.8 billion, one billion of which came from Tencent.

Meituan’s funding will be converted into a stronger logistics network, better operating system and more hands in the field for the company. Wang Xing, CEO, has revealed that Meituan has 15,000 employees. In contrast, Delivery Hero, according to their exit statement, only has 400 employees in the country. This, to some extent, shows the disparity of scale in operating in China.

Delivery Hero has built up a network of more than 200,000 restaurants in 34 countries to date, processing 10 million orders every month. The company has a better chance expanding elsewhere. The Chinese market, at the moment, is more of a battlefield for local magnates backed by industry giants.

For other less prominent competitors, it’s looking like it’s time to step away from the Red Dragon. As Östberg said in his statement: “There are fights worth fighting, for us, this is not one of them.”