China’s internet darlings are eager to grow after zero Covid

Two Chinese Internet companies that have emerged as corporate winners through the pandemic are adapting to renewed competition as the country begins to move away from its zero-Covid policy.

Food delivery group Meituan and bargain shopping app Pinduoduo earned Rmb11.8 billion ($1.7 billion) in the three months to the end of September as shoppers spent on food delivery and bulk purchases of consumer staples.

Meituan and Pinduoduo have also outpaced the country’s tech giants, growing their sales by 28 percent and 65 percent respectively. In the same period, Tencent’s revenues fell, while Alibaba’s grew just 3 percent.

But both companies are looking for alternative sources of revenue as Beijing this week announced sweeping relaxations of President Xi Jinping’s controversial zero-Covid restrictions.

“These are two of the highest quality companies in China’s internet space,” said AB Bernstein analyst Robin Zhu. “Both of them were flexible in the face of Shanghai’s lockdown,” he said, referring to the weeks-long shutdown of China’s largest city in the spring. He noted that both platforms quickly implemented ways to facilitate delivery to stay-at-home residents, such as group-buying services for residents living in the same apartment block.

Meituan and Pinduoduo have also benefited from Beijing’s campaign to suppress e-commerce giant Alibaba, which has forced some merchants to register only for its popular shopping platforms Taobao and Tmall. In the three months to the end of September, Pinduoduo’s online marketing services revenue, including merchant advertising spending, rose 58 percent to Rmb28.4 billion from a year earlier.

Meituan was able to raise prices as competitors pulled back and food delivery costs rose. “Meituan’s profitability has improved during the pandemic as people are unable to travel or leave their homes,” said Li Chengdong, head of e-commerce think tank Haitun. “They spend more on local services like food delivery.”

“The pandemic has undermined competition in the market,” said a former Meituan employee who left the company in a wave of job cuts in April. “There is no need for competitive prices or better products as long as the company can deliver food through the constraints.”

Meituan’s dominance may be fleeting. Beijing’s regulatory crackdown on anti-competitive behavior has opened the door for new players funded by deep-pocketed rivals.

On Monday, Douyin, China’s version of social media app TikTok, announced a partnership with three companies to provide food delivery services, directly competing with Meituan.

Li said the move means restaurants will shift some of their advertising costs from Meituan to Douyin.

Alibaba has also been fighting for market share by cutting costs in recent months. “Alibaba has withdrawn its price war and promotion campaign to develop its food delivery business this year, allowing Meituan to ease subsidies,” Zhu said.

Even so, Meituan’s various stable businesses mean the company could still benefit from China’s reopening. Zero-Covid controls have hurt the hotel and travel booking segment, which was its most profitable business before the pandemic.

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

Analysts said Meituan and Pinduoduo were able to make decisive moves during the lockdown to keep them ahead of the competition because the pair were still founders.

Meituan’s Wang Xing still leads the company as CEO, and while Pinduoduo’s Colin Huang has officially stepped down as CEO, he is still the largest shareholder and will play a central role in guiding the company’s direction, according to two people close to Pinduoduo. Continue. .

Meituan has carried out deep cost-cutting and staff cuts that have helped its profitability, insiders said. China’s powerful Cyberspace Administration said tech employment remained steady despite a regulatory campaign and falling stock prices, according to an industry survey in April.

But after presenting a rosy employment outlook to the regulator, “Meituan started firing people,” said a former employee. “The layoffs were made worse because the usual exodus of workers did not happen after Chinese New Year bonuses ran out.”

Pinduoduo and Meituan did not respond to requests for comment.

Despite Meituan’s growth and profitability, investors were rattled by major shareholder Tencent divesting its stake in the group, responding to pressure from Beijing to reduce the size of its Internet empire in China, people familiar with the decision said.

Meituan’s Hong Kong-listed shares have fallen more than 20 percent to HK$189 ($24) in the past 12 months, while Pinduoduo’s Nasdaq shares have risen nearly 50 percent to $91.

Pinduoduo has benefited from shoppers stuck at home turning to the hit app for deals. But after reporting a quarter of accelerating sales growth and rising profits, early backer Neil Shen of Sequoia Capital China, considered the country’s top venture capitalist, decided to leave the board and cash out some of the fund’s earnings.

Shen said last month that he resigned “to focus on my other interests and engagements.” Sequoia-related entities applied to sell $390 million worth of Pinduoduo shares on the same day.

The move comes as Pinduoduo enters the territory of Shein, another Sequoia-backed venture, in September with the launch of Temu, a fast-fashion venture targeting the insatiable appetite for cheap clothing among Gen Z consumers in the US. The group offered new buyers deals and incentives to sign up with clothing manufacturers.

“Pinduoduo will need to invest a large amount to enter this field,” Zhu said. “But the potential upside is huge, especially as the country moves toward a weaker economy as U.S. consumers switch to cheaper retailers.”

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