China technology: Burnout

Meituan-Dianping is a compelling growth story. The product of a merger between two companies that initially came to prominence for paid listings and discount vouchers, it has since expanded into travel bookings, movie ticketing, food delivery, ride-hailing, bike-sharing, and on-demand grocery delivery. The company has also started making investments overseas, targeting markets like Indonesia and India where online-to-offline (O2O) lifestyle services are still in their infancy.

Last year, the entire Meituan-Dianping platform facilitated transactions worth RMB357 million ($52 billion), more than twice the 2015 level. Revenue has increased more than eightfold over the same period, reaching RMB33.9 billion in 2017.

But what is growth worth if it isn’t accompanied by a clear sightline to profitability? This question used not to be asked in China, where the saying “the faster you burn [cash], the higher your valuation” has entered common parlance in start-up circles in recent years. It is therefore telling that senior executives from Meituan-Dianping spent much of the company’s pre-IPO press conference explaining how they appreciated the need for commercial discipline and wouldn’t try to grow too far, too fast.

Rather than moving aggressively into new markets, Meituan-Dianping remains firmly focused on the domestic market. And its core strategy is to be a “food-plus platform.” Expansion into new verticals will be measured and strategically driven – and the recent foray into the ride-sharing space, currently dominated by Didi Chuxing, will not extend beyond the current pilot program.

This should be viewed in the context of cost. The eightfold increase in revenue at Meituan-Dianping in the last two years has been accompanied by an equally eye-watering jump in expenditure, ensuring that profitability remains a distant prospect. The general assumption is that fast-growing start-ups can scale their way out of trouble as revenue continues to climb and costs flatten out. This may prove to be the case with Meituan-Dianping, but broadening business scope does not appear to be helping.

In the first four months of 2018, total costs reached RMB11.8 billion, up from RMB4.74 billion a year earlier. Food delivery costs doubled to RMB8.8 billion but so did revenue and transactions volume – and this is one of the company’s core businesses. Over the same period, driver subsidies in the ride-hailing business rose from RMB5.4 billion to RMB975.9 billion and the acquisition of bike-sharing start-up Mobike led to costs from new initiatives hitting RMB440.6 million, up from RMB17.4 million.

Meituan-Dianping’s expansion ambitions are being scrutinized because the company is unprofitable, unstable, and has yet to establish itself in the eyes of investors, public or private. The same description applies to a lot of start-ups in China, so if one of the country’s largest unicorns is fielding questions about business model sustainability a matter of days before its IPO, what does that say about investor sentiment on the rest?

As Chuan Thor of AlphaX Partners observes, a slowdown in renminbi fundraising has drained the market of competition in recent months, contributing to a softening in valuations. Once ready to argue why a fivefold increase in daily active users justifies a jump in valuation of equal magnitude, entrepreneurs increasingly come to investor meetings armed with breakdowns of their monetization plans.

It speaks to a more general weakening in the Chinese economy, driven by a crackdown on shadow banking as well as concerns about a trade war with the US. Confidence has taken a hit, as exemplified by recent stock market declines in mainland China and Hong Kong. For Meituan-Dianping as it prepares to go public, just as for the myriad start-ups targeting a dwindling pool of private capital, the days of burning through cash with little thought as to the consequences are over.

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• Topics
• Greater China
• Technology
• IPO
• China
• Meituan-Dianping
• AlphaX Partners