Meituan, Uber & Lyft – Tale of two bloodbaths.

A clear warning sign for Lyft & Uber IPOs.

• When I backed Meituan at its IPO as one of the more sensible listings (see here), I underestimated the lengths to which it is being forced to go to by Alibaba just to stay relevant.
• There is a clear read-across for investors in US ride-hailing, who I think will be better off avoiding the IPOs and buying in a later date.
• Meituan was created from the merger of Meituan and Dianping both of whom specialise in online to offline (O2O) transactions in China.
• O2O effectively means goods and services that are fulfilled by regular, offline types of businesses where the transaction is carried out online.
• Good examples of this are ride-hailing, food delivery, movie tickets, train tickets, doctor appointments and so on.
• Meituan also has some history with Alibaba which was one of the company’s first backers.
• As has happened many times in Silicon Valley, there was a disagreement over independence.
• Alibaba wanted Meitaun to integrate with its own app and effectively become part of its own ecosystem.
• Meituan declined and the next round was led by Tencent which put $1bn into the company but continued to allow it to operate independently.
• Consequently, in addition to Meituan’s core business bumping up against Alibaba’s logistics business, there is bad blood between the two companies.
• This has led to a totally unsustainable environment of discounting where it is substantially cheaper to have a meal delivered than buy it in the restaurant or even make it oneself.
• Bloomberg spoke to users who said that they were receiving roast duck at an 80% discount to the price in the actual restaurant, 40% discount on pizza and a 60% discount on bean curd.
• Not surprisingly, there is a constant crowd of delivery men at the gates of Beijing University as this is by far the cheapest way to eat.
• Meituan’s shareholders are the ones feeding the students as its last set of earnings showed costs rising 144% YoY as opposed to an 89% YoY increase in revenues.
• Gross margins are down to 22.6% from 32.0% a year earlier as the company is giving all of its operating leverage away in discounts that hit the gross margin.
• Furthermore, with 600,000 delivery drivers on its books, the company is already at scale meaning that the business model should be maturing and making money.
• However, just like Lyft (see here), Meituan is engaged in a bloody race to the bottom battle for market dominance with Alibaba.
• Both companies are extremely well financed but the difference is that Alibaba has a hugely dominant and profitable e-commerce business that supports its investments whereas Meituan only has its cash balance to sustain it.
• Furthermore, Meituan must now conduct this battle in the harsh glare of the public market which has already market its shares down by 30% from the IPO price.
• There is a strong parallel to be drawn here with Lyft and Uber, making me even more confident that I am doing the right thing by steering well clear of both IPOs.