July 11, 2020
China’s bustling digital economy has spawned thousands of startups. However, in the eyes of many, it remains “BAT or bust”, to quote a saying among job seekers at the country’s elite universities. The BAT in question refers to the original trio of Chinese internet stars: Baidu, a search engine; Alibaba, an online emporium; and Tencent, a titan of mobile payments and video games. The acronym is late in an update.
Alibaba and Tencent continue to dominate digital China. With market capitalizations of nearly $ 700 billion each, they are the seventh and eighth largest listed companies in the world, respectively. Having struggled to adapt as consumers switched from desktops to smartphones, Baidu ranks 319th; their previous peers can gain or lose the equivalent of their entire $ 45 billion market value in a day or two.
The BAT label also hides another development. Newcomers have been busy renovating the highest places in China’s cyber landscape. They include companies like JD.com, a $ 100 billion virtual store listed in New York, Didi Chuxing, a privately held giant valued at about $ 60 billion and ByteDance, with more than $ 100 billion , the largest unlisted startup in the world (which owns, among other things, TikTok, a short video app popular with Western teenagers).
None of them accelerated investors’ pulses later than Meituan Dianping and Pinduoduo. The duo has a lot in common. Both started by combining buyers with discounts (on spa and cinema tickets in the Meituan case and apple products on Apple iPads in the Pinduoduo case). Both were published in 2018 – Meituan in Hong Kong and Pinduoduo in New York. And both have seen stock prices rise since the beginning of the year (see graph). They are now worth more than $ 100 billion each. But their routes to these heights look quite different.
Start with the larger of the two, Meituan. It was founded in 2010 by Wang Xing, an engineering graduate from Beijing Tsinghua University, selling these discount coupons. Like Tencent and Alibaba, it has expanded to other areas. In 2013, it launched a meal delivery business and a travel arm that allows users to book hotels and flights. Two years later, it merged with Dianping, a restaurant review and booking platform similar to Yelp. In 2018, it paid $ 2.7 billion for Mobike, a bicycle-sharing service, and joined the ride, which expanded last year to dozens of Chinese cities. Today, Meituan can be thought of as “a service search engine,” says Elinor Leung, of CLSA, a broker.
Some of them, such as food delivery or bicycle sharing, are low-margin, high-volume businesses. In 2019, the company made a profit of less than three cents per delivery (mainly commissions charged in restaurants). But it does a huge amount of them. The platform has between 700,000 and 800,000 drivers at its disposal. Two out of three yuan the Chinese spend on food left at their doorstep pass through Meituan.
Like Mobike (which requires a lot of capital and is not yet profitable), the food industry attracts users who can be directed to more profitable offers, such as travel. Meituan’s operating margins on hotel bookings range from 20% to 35%. The pandemic briefly disrupted domestic reserves, but by the end of May it had recovered to 70% of pre-coronavirus levels.
Pinduoduo took the opposite direction from Meituan. Instead of spreading your bets, e-commerce has doubled. Online retailing is growing fast enough in China to justify not being “an all-business monkey,” says David Liu, responsible for the company’s strategy.
He’s right. China’s e-commerce sales could grow 16% this year, to 14.4 trillion yuan ($ 2 trillion), according to eMarketer, a research firm, even though total retail sales may fall by 4 % to 35 trillion yuan, as a result of the blockade toll. in physical stores. Alibaba will capture perhaps half of that growth. Pinduoduo will stay with JD.com for the rest. Buyers hit by the coronavirus slowdown may lean towards Pinduoduo’s bargains.
Central to the company’s rise is the concept of social shopping, which it describes as a merger of Costco and Disneyland. The products are cheaper if you buy in bulk with other bargain hunters. Users can join existing groups or invite friends using WeChat, a social messaging app owned by Tencent (which holds a 16% stake in Pinduoduo). Traders sacrifice margins in exchange for higher volumes.
Colin Huang, founder of Pinduoduo, who previously worked as an engineer at Google in America, did not invent group buying; Groupon has been making a version of it since 2008. But he developed the idea, for example, by introducing games that reward players with credits on future purchases.
Chinese buyers love it. At the end of March, 628 million of them had made at least one in-app purchase in the previous 12 months, 42% more than the previous year and 60% more than they bought on JD.com; only Alibaba has more active users (726m). Average annual spending has also increased, from 1,250 yuan to more than 1,800 yuan. The same is true of Pinduoduo’s participation in Chinese e-commerce – from 2% in 2017 to 10% last year. Bernstein, a research firm, expects it to be 18% by 2024, in line with JD.com.
The shopping frenzy increased Pinduoduo’s revenues by 44% year-over-year in the first quarter, to 6.5 billion yuan. The money comes from transaction fees and ads purchased by merchants to get their offers promoted in the app. Like eBay, but not many e-commerce giants, Pinduoduo has no inventory or operates its own logistics network, relying on merchants to transport products to buyers. Instead, it burns a spectacular and growing amount of money in sales and marketing: 112% of revenue in the first quarter.
Liu insists that these costs can be easily reduced. The experience of other markets suggests the opposite. Uber, which also combines salespeople (drivers) with buyers (motorcyclists), has been perpetually deficient. Like Uber, Pinduoduo enjoys some “network effects” – the more buyers using its app, the more sellers they attract, which in turn attract new buyers, and so on. But, again as in the greeting, buyers and sellers face little cost when switching to another app that offers a better deal. JD.com and Alibaba have already launched Pinduoduo clones in their vast user base.
The market is giving Pinduoduo the benefit of the doubt. The pandemic seems to have done no harm; confined Chinese consumers turned to the company for needs and sometimes a dose of retail therapy. With negligible business outside of China, she is, like Meituan, protected from the Chinese-American technological war that makes life difficult for TikTok, with its mostly non-Chinese users or Huawei, China’s telecommunications champion. The White House’s threats to expel Chinese companies from US stock exchanges have not dampened investor enthusiasm. Nor did the sudden departure of Huang, who stepped down as CEO on July 1 and reduced his stake in the company from 43% to 29% (he remains president and holds 81% of the voting rights).
Meituan’s path to wealth is clearer. It ended last year in black for the first time. Its lucrative weapons in food and travel have gained market share from competitors (such as Ele.me, Alibaba’s food delivery app, and Ctrip, China’s largest travel agency). This gives the loss-making divisions room to breathe financially.
Finally, both companies embody the excitement about the bright prospects for digital China. But TAMP will become the new BAT if both companies can match the consistently fat profits of Tencent and Alibaba. ■
This article was published in the Business section of the print edition, under the title “E-shopping frenzy”
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