(Bloomberg) -- Meituan warned it will remain in the red for several more quarters despite record revenues, underscoring the cost of competing against the likes of Alibaba Group Holding Ltd. in newer arenas from online groceries to community e-commerce.
Revenue climbed in 2020’s final quarter at its fastest pace in a year, to a better-than-expected 37.92 billion yuan ($5.8 billion). But the company swung to a net loss of 2.2 billion yuan during those three months after spending on burgeoning initiatives like community buying, a sort of micro-Groupon concept that’s taken off across China.
China’s economic recovery has helped the world’s largest meal delivery service increase orders, while its hotels and travel business benefited from a rebound in domestic travel when the country reined in the pandemic. That’s allowed Meituan to shift its focus to developing fast-growing new businesses while navigating heightened regulatory scrutiny.
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What Bloomberg Intelligence Says
Meituan may spend the next few quarters mired in operating losses as it ramps up investment in its community e-commerce business, capping a stretch of relative profitability that began early in 2019. The push to build its supply chain and delivery capabilities in rural areas for agricultural produce and grocery retail could be protracted, as deep-pocketed competitors such as Alibaba, Pinduoduo, and JD.com lick their chops while eyeing the same market.
-- Vey-Sern Ling and Tiffany Tam, analysts
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Chief Executive Officer Wang Xing has identified Meituan Select -- its community e-commerce -- as a “top priority” for the firm, which sees groceries as a key pillar of its “Food + Platform” strategy to build a super-app. But the business faces intense competition from well-capitalized internet giants including Pinduoduo Inc. and Didi Chuxing as well as a crop of plucky upstarts with names like Xingsheng Youxuan and Nice Tuan, all seeking to lure new customers in less-developed towns and cities across the country.
Investments in the business mean operating losses for its new initiatives division -- which includes Meituan Select and other grocery services -- may reach 25 billion yuan this year and total another 23 billion yuan in 2022, Citigroup analysts including Alicia Yap estimated in a research report last month.
“Increasing investments in new initiatives may continue to cause significant negative impacts on our overall financial results,” the company said in a statement. It “may continue to record operating losses in the next few quarters as we ramp up our community e-commerce business.”
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The aggressive competition has drawn the scrutiny of regulators. Meituan’s unit was among five community group purchasing services fined for improper subsidies that disrupted market order, the antitrust watchdog said earlier this month. State media has also criticized technology companies for focusing on online groceries instead of innovation.
For now, Meituan appears to have escaped the worst of China’s campaign against the excesses of its tech giants, which started with the scrapping of Ant Group Co.’s initial public offering last year and rapidly engulfed Jack Ma’s other flagship company Alibaba Group Holding Ltd. Still, President Xi Jinping’s warning that Beijing will go after so-called platform economies that have amassed data and market power signals the crackdown will widen.
In food delivery, Meituan’s biggest revenue contributor, regulators have begun paying more attention to commissions charged to merchants. The company also axed a healthcare mutual aid service, which had allowed participants to share in the costs for medical treatment, because of increased government oversight, local media reported earlier this year.
Meituan’s shares rose 5.1% on Friday before the release of the earnings report. The stock has dropped roughly 33% from its February peak, after having tripled in the past year.
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