Meituan proves the efficacy of RFM’s rule of thumb.
- There is a mad rush going on to use Meituan Dianping’s profitability as an example that food delivery can make money, but the reality is that it has really only come good because it has achieved dominance in its market and didn’t spend like crazy.
- Meituan is a super-app where all sorts of offline services can be accessed and paid for using a smartphone.
- It covers a whole range of areas but by far its biggest business at the moment is food delivery.
- Food delivery, like ride-hailing, classifieds, pet services and so on are all marketplaces where the aim is to become the go-to place to affect a transaction.
- Once this hallowed status has been achieved, then the marketplace in question can charge a higher commission to the sellers and buyers will accept higher prices.
- This is very difficult to achieve, but once there, it is a licence to print money and is very difficult to dislodge.
- 4 years ago (see here), RFM proposed a rule of thumb by which the successful market places can be separated from the perennial losers.
- The rule of thumb that RFM still uses is:
- A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making a profit.
- 12 months ago, Meituan was really struggling as its competitor in China Ele.me was spending like crazy and could afford to do so as it is backed by Alibaba.
- Meituan’s market share was less than 60% and it was losing money on marginal transactions meaning that as revenues grew, losses increased.
- However, in Q2 2019, Meituan broke even as its market share passed 60% and grew to 66% and it became the go-to place to order food.
- This is evidenced by the fact that its 436m users make 17% more purchases on the platform than they did 12 months ago.
- This was combined with serious cutbacks at its other marketplaces (bike-sharing and ride-hailing) where it was never going to achieve this hallowed status resulting in profitability.
- This in no way guarantees that UberEats or any of the others will now become profitable but should instead sound a note of caution.
- The fact that Uber is in the process of selling its UberEats operation in India to Zomato is evidence that Uber knows that this is the case.
- Instead, this underlines to all the wannabe market place platforms out there that one has to win the brutal battle for supremacy before one can hope to make a return on investment.
- This can be a long and painful process especially when both sides have very deep pockets.
- It looks to me that Meituan has now turned the corner and once it has really cemented the dominance of its food delivery offering, it will be able to make very healthy margins.
- Furthermore, there will also be the opportunity to leverage the platform into adjacent areas and keep growth going.
- This will require careful execution but the performance of the management team in the last 12 months is a good sign.
- I think Meituan has further to travel and serves as a very good example of what to look for in other marketplace offerings.
