New regulation in China to hit food delivery giants’ profit model

22 Feb 2022 230 views

Between 2016 and 2020, the number of people who ordered food online in China doubled to 400 million. The boom was in part thanks to the generous subsidies shelled out by the country’s food delivery contenders for customers and businesses. As two companies, Meituan and, came to dominate the market, they began to raise fees on merchants. But a new regulatory change is about to hobble their profit model.
On Friday, a group of Chinese authorities announced that food delivery platforms should further reduce the service fees charged to restaurants in order to lower the operating costs for food and beverage businesses. The news sent Meituan’s stock down more than 15% on Friday, erasing over $25 billion in market value. Alibaba, which operates Meituan’s archrival, saw its shares slide about 4%.
The proposal came in a directive led by China’s National Development and Reform Commission, the country’s state planner, to “help struggling service industries recover.” The new rule will likely taper the profits of the internet behemoths in the long run. Commissions contributed as much as 60% to Meituan’s revenues in the three months ended September 2021. The firm also charges commissions from other types of merchants like hotels, though food delivery remains its largest revenue driver. Food delivery has been one of Alibaba’s main businesses following the firm’s acquisition of in 2018, but e-commerce is still the giant’s main revenue engine.
China’s food delivery platforms have grappled with other changes that could erode their profitability. A viral article from 2020 brought to light the high-stress environment that put China’s millions of food delivery workers in danger. Efficiency-optimizing algorithms that don’t fully factor in human capacity and road incidents mean riders are often running the light to complete assignments.

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