Ep. 25: The O2O Local Services War: Alibaba vs. Meituan? Part 1: Ele.me

Transcript

We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network.
We are a new weekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. TechBuzz China is a part of Pandaily.com, a new English language site that tells you “everything about China’s innovation.”

(Y: Ying-Ying Lu; R: Rui Ma)

[00:00] R: Ooomph. There’s some major hurt going on in the public markets right now, and Chinese companies, already pummeled, are mostly sliding even further.
Y: One of the only bright spots had been Meituan, which we covered in depth before and which had debuted on the Hong Kong Stock Exchange at a valuation of about $50Bn, but even that is now lost because not yet a month later, it has lost about 25% of its market cap.

[00:33] R: As far as we can tell, this is probably mostly attributable to the market-wide decline. But as Alibaba further firms up its strategy for 本地生活, or local services, there’s that much more pressure on Meituan to defend itself against what is shaping up to be a big battle.
Y: Maybe not quite an existential battle, but this war of O2O, or online to offline, is shaping up to be intense, and the opening shots have been fired, loud and clear.

R: Well many of those shops have actually been fired, but the latest round is the finalization of the merger between food delivery rival Ele.me, that’s spelled E-l-e-.-m-e and Alibaba New Retail subsidiary, Koubei, that’s spelled K-o-u-b-e-i.

[1:26] Y: If you’ll remember, Alibaba had completed its acquisition of ele.me back in April of this year for an implied valuation of $9.5 billion. Was that the biggest acquisition in Chinese internet history? I think it was!
R: And this new Ele.me-Koubei entity, which is still unnamed, has already received an additional $3 billion in investment, from Alibaba and Ant Financial, but also of course from, you guessed it, Alibaba’s BFF Softbank.

[1:58] Y: I don’t think the money flowing in will stop there, because the official wording that accompanied Alibaba’s Q2 earnings release referred to this amount as “as of the time of this announcement.” So, there is probably more on the table, but maybe not immediately.
R: Meituan, if you’ll remember, only raised $4.2 billion in its IPO. Not a small number by any means, but not vastly more than $3 billion.

[2:27] Y: Well, Alibaba has always been spectacularly good at raising capital, and now that it’s so focused on this local services business, which just seems so synergistic with its New Retail and Logistics businesses, should Meituan be worried?
R: Yeah, Wang Xing, who has been through and triumphed in the Thousand Groupon War, and is a hardened warrior if there ever was one, should he be losing sleep? Or does Team Meituan have it covered, especially with Tencent at its back?

[2:56] Y: This is another one of our fun multi-part series deep dives, so I hope you sit back and listen, as we go into the first part of what’s shaping up to be a massive war in the local services space and two of its leading players, Meituan and Alibaba.
R: But today, we start with Ele.me., which is kind of spearheading Alibaba’s side of troops.
Y: It took a pretty circuitous route to get here though. But no worries, because we will explain how it all happened.

[5:08] Y: Alright guys, this is a messy battlefield, so we are going to take some time to give you your bearings. If you aren’t familiar with Meituan, “A Chinese app that does just about everything” according to CNN at least, then do listen to our Episode 23, which is a replay of our earlier deep dive on this super app.
R: Indeed, as we mentioned, Meituan aspires to be the “Amazon of services,” and is currently dominating food delivery in China, as well as movie ticket sales, bike sharing, travel, and it even made a serious foray into ride hailing. Although for that last market, it has conceded to Didi in order to make good on its promise to its shareholders that will prioritize its profitability.

[5:52] Y: Yeah, for a while, it seemed that Meituan was on an unstoppable roll. Every industry it went into, it seemed to win. Didi must be super relieved that Meituan has eased up on transportation, or else it might have suffered the same fate that Ctrip did with regards to hotel bookings. Despite only having been in the business for a few years, Meituan now has 46% market share, that’s half, in China hotel bookings, versus just 22% by Ctrip, which is China’s largest travel company.
R: That’s honestly mindblowing. I thought I’d never see the day Ctrip could be toppled in any travel-related metric, especially after it acquired so many rivals. But there you have it. Meituan, as we’ve said, is fierce. It’s been through the wringer. But it would have never been allowed to continue in its bulldozing ways unchecked.
Y: No, the sectors it’s in are just too lucrative, too ripe for disruption, to not attract the attention of other entrepreneurs. In China, no good business opportunity goes unchallenged, as Meituan well knows, from the Thousand-Groupon War. Again, check out our earlier episode for coverage on those exciting times.

[7:09] R: Since Tencent already owns about a fifth of Meituan, CEO Wang Xing does not need to worry about Pony Ma jumping into the fray, although in China, that’s not an absolute impossibility. But Wang Xing must have known after the merger that Alibaba was his true threat.
Y: Yeah, not only was it strategically obvious, but after Tencent-invested Dianping merged with Meituan to create the gargantuan super app it is today, Alibaba still had some remaining ownership in the combined company, but it quickly sold that for $900mm in early 2016, presumably to clear the way to create or acquire a rival business.

[7:54] R: Well, it ended up going the acquisition route. Almost immediately after Dianping and Meituan merged, Alibaba and Ant Financial announced a $1.25 billion investment into Ele.me that meant it would own more than a quarter of the company.
Y: And we know what happened after that. It increased its stake by putting in another one billion dollars into Ele.me in 2017 before finally acquiring the entire business outright earlier this year for an implied valuation of $9.5 billion.

[8:26] R: But what is Ele.me? Well, first of all, it means, “Hungry Now?” But also it is looking like it’s probably the most successful dorm room startup in the history of Chinese internet.
Y: Bike sharing pioneer Ofo could have had a chance, but that now looks unlikely. Ele.me is the clear winner here. Former CEO now Chairman Zhang Xuhao 张旭豪 was a first year graduate student at Shanghai Jiaotong University, a top ranked school in China, when he started the company with 5 other friends back in 2008 and launched the site in April 2009.

[9:03] R: Apparently, from the very beginning, Zhang Xuhao was convinced he had the idea for a $15Bn business. I don’t know what math he did there, but the point is, he was a big dreamer from the get go. Anyway, one version of the founding story says that the idea for Ele.me started because the founders were playing a ton of video games and they didn’t want to leave their computers to feed themselves. So they thought, what if we could order food from our computers?
Y: Kinda like the Uber origin story. Pretty memorable. We built this from scratch to scratch our own itch sorta thing.

[9:39] R: Yeah, but the other version, which makes for a less great story but I think may be more accurate, simply talks about the fact that Zhang and main co-founder Kang Jia were just really disillusioned by school and just wanted to do something exciting with their lives. And back in 2008, entrepreneurship was both rebellious and unconventional, not like the well-traveled path it has become today.
Y: Maybe because they were basically student entrepreneurs though, the first few years were pretty tough. They started off by actually doing delivery for a restaurant to “get to know the business.” Basically, Zhang Xuhao and his buddies could often be seen riding his bike around campus delivering food.

[10:25] R: The venture was self-funded and they struggled for a few years before finally landing angel investment of a few million dollars from GSR in early 2011. I think that really set them up for later success, because the partner that led the deal was Allen Zhu, literally one of the best investors in China, especially in this on-demand marketplace segment. Two other quintessential Allen investments? Didi and Ofo. See what I mean? The guy is a megastar investor.
Y: By 2014, Sequoia China and Matrix China had joined in and become investors, but it wasn’t all good news. Despite starting way earlier than Meituan in the food delivery business, Ele.me was finding that after six years, it was still operating in 12 cities while Meituan had expanded, in a matter of six months, to 100 cities.

[11:18] R: Well, now in media it’s popular to term this phenomenon “consumption trickle down,” 消费下沉, i.e. serving those outside of China’s richest and mostly coastal middle class. But back then, all the Ele.me founders knew was that they were seeing a booming delivery business in smaller cities they had never considered as markets.
Y: If you’ve been following Techbuzz, I think you’ll find this realization pretty unsurprising. The Ele.me founders were students at one of China’s most elite universities and they probably lived in somewhat of a bubble, and mostly saw the “consumption upgrade” or 消费升级, which was indeed also taking place in China at this time. And I mean who’s to say they were wrong? If you are ordering takeout, that does imply a certain level of earnings power. So their logic was pretty sound. Their competitor Wang Xing, on the other hand, had plenty of experience with second, third, and even lower tiered cities in China from the Thousand Groupon War, so he knew that the demand existed everywhere, not just in China’s megacities.

[12:31] R: Basically, Ele.me was doing well but was still fairly small by the time that it got its big break. Five years in, it had only raised something like $25 million. But in the summer of 2014, Dianping put in $80 million, a ginormous amount of money for the time, and this, together with a strategic tieup, enabled Ele.me to embark on an accelerated expansion plan.
Y: Dianping had really suffered in its fight with Meituan in the Thousand Groupon War, and it was looking for allies. Meituan was enemy No. 1 and Dianping was determined to win the food delivery battle. I don’t know why they picked Ele.me, as there were plenty of food delivery companies at the time. But it probably helped that both were headquartered in Shanghai, headed by Shanghainese, and Ele.me was one of the earlier players, well positioned but still small enough to influence in a big way.

[13:33] R: Armed with this cash, ele.me expanded quickly to 200 cities. Maybe because they felt FOMO in a big way, but they got pretty crazy aggro. For example, they had their new hires go through boxing training to increase aggression. No joke. Around this time too, there were lots of news and viral videos of Ele.me and Meituan employees, basically the delivery staff, getting into violent group fights. Headlines ran along the lines of — is this food delivery or is this the mafia?
Y: Yeah it was totally crazy. But what do you expect, Ele.me went from 300 employees at the end of 2013 to more than 5000 at the end of 2014. But all in all, it was doing pretty well. The tieup with Dianping, which was still the leading “Yelp” of China, gave it a lot of much needed traffic volume. And Dianping, which was invested in by Tencent, brought some Tencent investment to Ele.me as well.

[14:38] R: It was doing well! In 2014, its market share was ahead of Meituan at 30% versus 27%. In the first eight months of 2015, it had raised a combined one billion dollars from Tencent, JD and some other players. I know nowadays that seems like nothing, but back then it was unheard of. Meituan, by the way, was supposedly running out of money. So Ele.me and Dianping looked like maybe they were gonna win. Or so they thought.
Y: Indeed, some friends who worked for these companies at the time corroborate this version of events. But, then the unthinkable happened. When Zhang Xuhao was having an offsite in Bali in October during Golden Week, Tencent-invested Dianping and Alibaba-invested Meituan entered into a merger agreement.

[15:33] R: Facilitated by none other than Bao Fan, star of our last episode. But yeah, it was probably the quickest mega-deal ever completed, and it left Ele.me confused as heck. In the space of two weeks, Ele.me’s biggest competitor Meituan had merged with Dianping, its major shareholders so its nemesis was now … its partial owner? What happened?
Y: Seriously. That must have been so confusing. And for a little bit, it was not super clear who was going to have control of the combined entity. Was it Meituan’s Wang Xing or Dianping’s Zhang Tao? Well, as we now know, Wang Xing won out. But his major shareholder Alibaba did not. Meituan, in a stunning reversal, became Team Tencent instead. In fact, Tencent was supposedly the impetus behind the merger.
R: Naturally, at this point, Tencent would have wanted Ele.me and Meituan to combine, having stakes in both companies. Sequoia, who was also a common shareholder, proposed that Ele.me sell itself to Meituan. However, there was a huge gap in valuation expectations and no deal was reached.

[16:51] Y: Ele.me asked instead that the food delivery business be spun out of Meituan, merge with Ele.me and basically become a separate company that can then go on and fundraise on its own. Probably this would then be run by Zhang Xuhao and his team. However, neither Wang Xing nor Sequoia agreed to that. So talks stalled.
R: Ele.me, who had been high-flying in 2015, all of sudden found that its biggest source of traffic, Dianping, was gone. And having won the Groupon war, Meituan was now all-in on food delivery, even more than before. And whatever trouble it had fundraising before, that was all gone. Having consolidated its largest competitor and gotten sugar daddy Tencent on board, it was finding fundraising to be a breeze too. The competitive dynamics had completely reversed.
Y: Meanwhile, Alibaba, who had lost control of the combined Meituan-Dianping entity and now had no horse in the food delivery race, or at least not a leading one, naturally became Ele.me’s savior and eventual acquirer. Three years later, Zhang Xuhao did not get his $15 billion outcome after all, but I don’t see how he can complain about an all-cash acquisition of $9.5 billion. Even with all the dilution, it is estimated that he’s still worth over $300 million. And guess what? He did all this by age 33.

[18:22] R: Yingying, you still have a few more years to beat him. What do you think, can we get Techbuzz to unicorn status by … say, 2020?
Y: First unicorn podcast? … no problem, Rui! But seriously, back to ele.me, after selling to Alibaba, Zhang Xuhao and his team are no longer managing the company. Well, Kang Jia is still there heading up logistics, but Zhang is now just the chairman and the high level consultant to Alibaba’s local services business. Alibaba installed former Alibaba Health CEO Wang Lei 王磊 as CEO.
R: That’s to be expected, since Zhang Xuhao is quite young and hot-headed by Alibaba standards at lease. Ali loves even-tempered execution-oriented professional managers. They don’t want someone like Zhang who is known for being brash. I mean, Zhang Xuhao was even in the news for getting into a drunken fight a few years ago.

[19:23] Y: Zhang Xuhao might have been the right founder to get Ele.me to where it is today. It made about $400 million of revenues in Q2 of this year, or about 3% of Alibaba’s total revenues. That means it’s probably at least $1.5 billion or more in annual run rate. But still, Alibaba doesn’t seem to think the team is the right one to beat Wang Xing. Using Silicon Valley speak, basically Zhang was great for getting the company from 0 to 1 and even succeeded wildly at 1 to 10, but maybe he is not the right guy or gal from 10 to 100.
R: I don’t know about that, Ele.me had about 15,000 employees before the acquisition, so is that not 10 to 100? I mean, it also had 260 million users in 2000 cities in China covering 1.3 million restaurants!
Y: That’s true. It also grew its 蜂鸟配送 which is its own self-developed courier business to 3 million registered couriers averaging 4.5mm deliveries a day. By the way, Rui, it’s too bad we both moved out of China before that became super cheap and convenient. I know Pandaily uses this one and similar services all the time. Anyway, agreed that Ele.me is a massive company by most measures.

[20:51] R: It’s giant, just not Meituan-sized giant. Wang Xing has indeed done a better job with Meituan, although of course there’s a good deal of growth that wasn’t organic, such as the Dianping merger of course.
Y: Well don’t forget that Ele.me did also buy Baidu’s food delivery business as well, although that was a much smaller acquisition at just $800 million.
R: Yeah. But if Ele.me was at say, 100 when it got acquired by Alibaba, Meituan is at 1000. Come on, Wang Xing took the company not just from 0 to 1, but from 0 to 1000. Meituan, if you’ll remember, had $5.2 billion in revenues last year. So that makes it about five times of Ele.me. And it was founded two years later. Meituan also has a leading position in all sorts of O2O services, or what’s now being called local commerce AKA local services, 本地生活.

[21:53] Y: Let’s make sure our listeners understand that it’s not that Ele.me has not kept up. Ele.me, especially after being folded under the Alibaba umbrella, has definitely also expanded into adjacent business lines beyond just delivering restaurant food. In the first 8 months of this year, Ele.me saw 85% year-on-year growth in grocery and perishable good delivery, 60% growth for cakes and flowers and plants, and growth in medicines of 815%, that’s eightfold.
R: That may just be the tip of the iceberg. It was only on August 1 that Alibaba officially added a link for Ele.me into its mobile Taobao app front page. That makes it instantly easier for the over 400 million users of Alipay and Taobao to use Ele.me services. Boom! There we go! And as we mentioned before, there’s a new wrinkle, or shall I say, opportunity that Meituan may not be able to access as easily. In the past two years, there’s a new category that has opened up that’s closely related to all of this, and that category is New Retail.

[23:07] Y: We will definitely be devoting a lot of time to 新零售 in our next episode. But just to give you some heads up, while exact definitions differ, it is probably what your intuition tells you it is. According to Jack Ma, it is “a seamless merger of offline, online and logistics for a dynamic new world of retailing.”
R: For both Tencent and Alibaba, a huge part of it is investing in supermarkets and disrupting grocery shopping, much like what Amazon has done here in the US with Amazon Fresh, cashierless stores AmazonGo, and its acquisition of Whole Foods. Tencent and Alibaba now both have either invested in or outright own supermarkets where online delivery is available and convenient. And of course, it helps that both of them already have massive mobile wallet and payment platforms that make it really easy to onboard new customers.

[24:05] Y: It’s probably too early to say who’s going to win the New Retail war, Alibaba or Tencent, although that is definitely an interesting debate and another “war.” But for the time being, Alibaba, with its commerce roots, seems to have made it more of an emphasis. In Alibaba’s last earnings release, it highlighted New Retail and Local Services as major parts of its Core Commerce unit, you know, aside from Taobao, Tmall, and all that good stuff.
R: In that press release, which is dated August, Ele.me and Koubei, which now you know have merged, are both listed under Local Services. But, you might find it interesting to note that as of the beginning of this year, Koubei was still most definitely considered part of Alibaba’s New Retail strategy, not local services.

[24:57] Y: What is Koubei? What is New Retail? Why is New Retail bleeding into local services? How do these reinforce each other, or do they? Are they labels, which are just kind of meaningless? And why is there always a war in Chinese internet? Who’s going to win this war?
R: So many great questions that I’m sure many of you Techbuzzers are out there asking. But you’ll have to wait untill next week for our deep dive into Koubei, the other half of Alibaba’s weapon against Meituan. Then you will have to decide for yourself, are we just being dramatic, or is this really a battle worth paying attention to?

R: We’d like to give a shoutout to our partners at SupChina. In addition to our podcast here with Pandaily, they publish the excellent Sinica podcast, a weekly discussion of current affairs on China with journalists, writers, academics, policy makers, and business people.
Y: And Sinica has been adding steadily to its growing podcast network! There’s NuVoices, which features women, as well as the new ChinaEconTalk, and of course the wonderful Caixin-Sinica Business Brief. Check these out wherever you get your podcast!

Y: OK, that’s all for this week folks! Thanks for listening. We really enjoyed putting this together, and are always open to any comments or suggestions. You can find us on twitter at thepandaily, techbuzzchina, and my personal Twitter account is GINYGINY.
R: And my twitter is spelled RUIMA. We’ll be back here same time next week!

TechBuzz China by Pandaily is powered by the Sinica Podcast Network. Pandaily.com is an English language site that tells you “everything about China’s innovation.” Our producers are Shaw Wan and Kaiser Kuo. Our intern is Wang Menglu.