Meituan appears to control a system, but it is also destined to be the one walking a tightrope in that system, watched by all.

On March 25, Meituan released its Q4 and full-year 2021 financial results. It was a severely polarized report card: on one hand, 2021 set a record for Meituan's largest operating loss, all from new businesses; on the other hand, profits from food delivery and in-store hotel & travel achieved record-breaking growth, with food delivery profits hitting a new high.

What drew attention was Wang Xing's statement during the earnings call that delivery revenue does not cover delivery costs, and the act of delivering food itself loses "1 yuan per order."

Wang Xing's mention of delivery "losses" conflicts with the profitability of the food delivery business, creating a cognitive blind spot that makes it hard for the public to grasp the logic at once.

The fact that the food delivery business can be profitable in the current environment reflects Meituan's control to some extent. But Meituan stands at a crossroads, needing to look forward and backward. It has the responsibility and must maintain a balance of interests among merchants, riders, and users in the food delivery industry, building a mutually prosperous ecosystem. Especially against the backdrop of the pandemic, this task is even more arduous.

2021 was an extraordinary year for Meituan. It was fined 3.4 billion yuan for antitrust violations, faced constant scrutiny over rider social insurance and merchant commissions, and as a listed company, it had a responsibility to create sustained growth. Facing a series of visible risks, the financial report shows that the company wants the public to know that it is also struggling.

The Tightrope in a Complex System

In the earnings call after the Q4 2021 results, Wang Xing pointed out that the company's Q4 delivery service revenue was 14.3 billion yuan, far below the related cost of 18.3 billion yuan, meaning food delivery itself is equivalent to "losing 1 yuan per order."

GeekPark observed that this remark sparked some controversy on social media, with some netizens accusing Meituan of "pleading poverty."

In fact, the calculation of "losing one yuan per order" is not hard to understand.

In fiscal year 2021, Meituan's food delivery service revenue was 54.2 billion yuan, while the delivery costs paid to riders were 68.2 billion yuan, meaning Meituan had a net expenditure of 14 billion yuan on delivery services. With 14.37 billion annual food delivery orders, the average loss per order was 140/143.7 = 0.974 yuan.

Notably, this financial report is the first time Meituan has separately presented "commissions" and "delivery service revenue."

In the new fee rate policy launched in May 2021, Meituan split the fees charged to merchants into technical service fees (i.e., commission income) and food delivery fees. Previously, commission income in financial reports included both items. In other words, Meituan's definition of "commission" has changed.

In response, Meituan said it is not that the definition of "commission" has changed, but that the previous statistical method was misleading; "only now are we showing the true commission."

With the different definitions of "commission" before and after, Meituan's commission rate does appear to have declined. Before the fee reform, Meituan's commission rate was roughly 17% to 22%. After the split, in 2021, Meituan's food delivery commission income (only technical service fees) was 28.5 billion yuan, with total food delivery transaction amount of 702.1 billion yuan, making the platform commission rate 4.1%.

Meituan 2020-2021 commission, delivery, and delivery-related cost changes |Data source: Meituan financial report

Calculated by GeekPark according to the previous definition, in 2020, food delivery commission income was 58.6 billion yuan, with 10.1 billion transactions, meaning merchants paid an average of 5.8 yuan per order to the platform.

In 2021, food delivery commission income was 28.5 billion yuan, delivery service revenue was 54.2 billion yuan, totaling 82.7 billion yuan, with 14.4 billion transactions, meaning merchants paid an average of 5.7 yuan per order to the platform, a slight decrease of 0.1 yuan per order, equivalent to giving up 1.44 billion yuan in revenue amid growth.

Meituan officially responded to GeekPark, saying that separately disclosing food delivery service revenue is not a "word game." Meituan aims to show that a significant portion of the fees collected from merchants goes directly to the delivery segment.

According to the financial report, this revenue is not even enough to cover delivery costs, requiring Meituan to subsidize the delivery side from commissions to balance. The main component of delivery-related costs is rider income.

In the three-party transaction among Meituan, merchants, and riders, merchants pay commissions to Meituan, which pays most of it to riders, and the remainder is the true "technical service fee" income that Meituan earns from building this massive system based on digitalization and AI technology.

In fact, in Meituan's current model, merchants and the platform jointly pay rider costs. However, the US food delivery platform DoorDash does not do this. DoorDash chooses to have consumers who enjoy delivery services directly bear this cost.

DoorDash's prospectus shows that the platform charges users the total dollar amount of ordered items, delivery fees, and any pass-through payments such as taxes. Additionally, consumers also pay tips. Merchants only pay platform commissions.

In theory, having consumers directly bear delivery fees would simplify things. But with the early food delivery subsidy wars, Chinese consumers' payment habits are still being gradually established. For food delivery platforms, raising prices for consumers cannot be done overnight.

Objectively, compared to other internet platform companies, Meituan's commission rate is at a relatively low level. This is not because Meituan is inherently noble, but because its business model is one of the more complex among internet platform companies.

In comparison, Didi, for example, only faces two parties: consumers and drivers. Consumers pay fees, Didi takes its "system value," and the rest goes to drivers.

In the food delivery model, the platform has an additional link: facing riders. Consumers pay fees to the platform, which then pays merchants, then pays rider wages and other costs. The surplus is the platform's "system value," i.e., true profit.

Given that there are real competitors in the market, and the total fees consumers can bear are constrained by market competition or purchasing power, this more complex system faces a more complex problem of dividing the pie.

Many people think that internet platforms' business models are like "middlemen," since it seems consumers pay the platform, the platform serves merchants, and it takes a "commission" as income.

But in the digital world, building such a massive and efficient platform system (Meituan has the capability to complete tens of billions of deliveries per year) cannot simply apply the traditional business concept of "middleman"—creating and operating such a system also requires significant costs. Meituan wants to clarify that its "commission" is a "technical service fee," aiming to establish this understanding.

Currently, the model of Chinese food delivery platforms is indeed thin-margin. In May 2021, DoorDash also made transparent fee adjustments, with delivery commissions at 25% and 30% (Meituan is currently at 7.7%). Its high pricing stems from higher labor costs in the US market—but note that labor costs in the Chinese market are also rising rapidly.

The reason is that in the food delivery system, merchants take risks to open stores and invest, and riders use high-intensity work to improve delivery efficiency. These two parties cannot be overly squeezed. If merchants exit the platform and riders stop working, the balance of the four-party system will collapse.

In China, although Meituan has been severely punished for antitrust violations like "choose one of two," actual market competition prevents it from raising prices for consumers to maintain market share.

Therefore, in this four-party system, any rational platform cannot prioritize maximizing its own profits but must maintain the complex and fragile system balance. To earn more, it cannot rely on grabbing others' shares but must rely on technology, scale, and other means to improve efficiency, expand the market, and make the pie bigger.

Today, Meituan using "technical service fees" to subsidize "food delivery costs" may seem like a loss, but it is a balance it must strike. In theory, if Meituan did not provide or provided fewer delivery services (in Meituan's services, merchants can choose self-delivery), the problem might seem simpler.

Western Mahua is one such chain brand merchant that does self-delivery. Online operations manager Guo Ping said that Western Mahua launched its food delivery mini-program in February 2021. "Order volume is good, and the saved commissions roughly offset the cost of hiring riders, so user spending is similar to the platform. But our goal is not to make money from self-delivery, but to connect member and fan benefits."

Wang Xing explained in the earnings call that if they gave up providing delivery services to merchants, it would result in most small and medium merchants being unable to afford self-delivery, some price-sensitive users having to give up food delivery, and the delivery experience for most users being greatly compromised.

According to Wang Xing's reasoning, this would turn Meituan into a local life services marketing platform, serving only those local life service brands that can afford marketing costs. The platform's scale advantage and significance to China's service industry would be lost, and it would truly become a middleman "earning the difference" (advertising fees)—and Meituan would never do that.

So, for Meituan, walking the tightrope in a complex system must continue.

If the System Doesn't Upgrade, It Will Involute

In April 2020, the pandemic-hit catering industry launched a collective pressure campaign against the food delivery platform Meituan.

First, represented by the Guangdong Catering Industry Association, a letter titled "Guangdong Catering Industry's Joint Letter to Meituan Waimai" pointed out that after the pandemic, Meituan continued to significantly increase commission rates, with commissions for new catering merchants (including split rider delivery costs) reaching as high as 26%.

Catering associations in Chongqing, Shandong, and other places also issued suggestion letters and recommendation letters, calling on Meituan to reduce commissions. Meituan subsequently responded with commission reduction measures.

During the years of rising labor costs in China, rider costs increased, and Meituan's commission rates also rose: before 2019, the commission rate was around 15%, then rose to 17%-22%.

In March 2020, Meituan launched the "Spring Breeze Action": a "Merchant Partner Commission Return Plan" that, for high-quality catering merchants nationwide, directly credited no less than 3%-5% of food delivery commissions to merchants' Meituan accounts, usable for online marketing and traffic promotion—but this support plan did not truly win merchants' appreciation.

Many merchants had complaints about the "commission return." Guo Ping told GeekPark that the returned "commissions" could only be used to purchase promotions to increase exposure, not withdrawn.

Over the year, due to the ongoing and repeated impact of the pandemic, the catering industry's dependence on food delivery continued to increase, and discussions about fee reduction never stopped. Facing continuous public opinion on fee reduction, on one hand, Meituan had to "care" about merchants and painstakingly maintain the "fish-water relationship" between the platform and merchants; on the other hand, Meituan needed to make merchants and the public understand its thin margins.

A fee reform that had been planned and piloted internally for nearly two years was finally launched.

From May 1, 2021, Meituan implemented fee reform rules in all its directly operated cities—splitting the previous fixed rate into technical service fees and fulfillment service fees, and only calling the technical service fee a "commission." The technical service fee is fixed at 5.8%, while the fulfillment service fee is only incurred when merchants choose Meituan delivery, including rider wages, etc., and is charged in tiers based on distance, price, and time period, varying per order.

Meituan stated that the focus of the fee reform is to let merchants clearly know what the commission includes and how much they pay for each part.

GeekPark observed that the three dimensions of distance, time period, and average order value point to an "upgrade direction" for the food delivery system that Meituan hopes to build.

Under the distance indicator, a base fee is charged within 3 kilometers, and orders beyond 3 kilometers incur an additional fee per kilometer. A Meituan merchant-side source mentioned, "After our calculations, maintaining the ecosystem within three kilometers is beneficial for merchants' long-term development."

It is understood that within 3 kilometers, Meituan's rider delivery costs are relatively stable and more efficient. Beyond that range, rider costs and merchant costs rise.

Under the time period indicator, nighttime delivery rates are higher, but the average order value at night is also higher. "The average order value for late-night snacks is actually higher than during regular meal times, and rider wages are higher, so this part of the commission is also higher." Overall, high-value orders during non-meal times represent incremental space for merchants, riders, and the platform.

Average order value is also a metric Meituan hopes to increase. According to financial report data, since 2017, the average order value for food delivery has risen from 41.83 yuan to 48.18 yuan in 2020, and in 2021 it increased to 48.9 yuan, a minimal increase.

Overall, under the new rules, for short-distance, high-value orders, the platform's overall fee rate is significantly lower, but for long-distance, low-value orders, the overall fee rate is significantly higher.

An individual merchant told GeekPark that their average selling price per item is 20 yuan, with offline gross profit of about 8 yuan. After deducting technical service fees and rider delivery costs, depending on time and distance, the profit per order ranges from -3 to +3 yuan. The sum of technical service fees and delivery costs fluctuates between 5 and 10 yuan.

The aforementioned Meituan source explained, "Food delivery hopes to guide merchants to have clearer operational strategies. Long-distance, low-value orders after the reform will be 'losing money but gaining popularity' (which was very common before). Merchants, riders, and the platform all lose; only consumers might win."

In an internal document about the fee reform obtained by GeekPark, it mentioned that one of the purposes of the fee reform is to implement "differentiated operations" for merchants, and "merchants with higher value to the platform" actually have different technical service fee rates. Through Meituan-related sources, it is understood that the original intention of the fee reform was to make fees more transparent, let merchants clearly know the composition of each fee, and help merchants reduce costs through fee splitting.

In the explanation of Meituan's merchant-side source, high-quality merchants—mostly chain brand restaurants—are Meituan's key focus. After the fee reform, merchant costs vary: some short-distance orders have reduced costs, while some low-value, long-distance orders seem to have increased costs.

The head of a chain brand also told GeekPark that the commission rates signed between each merchant and the platform are different and are confidential. "We negotiated the rate with Meituan in May and only finalized it in July. Overall, it increased by about 1.5 to 2 percentage points."

It can be seen that the transparency of the fee reform refers to transparent billing rules for each merchant per order. After the reform, each city has a unified charging standard, and merchants in the same city are charged uniformly.

Differences mainly exist for some chain brand merchants, because chain brands are distributed nationwide and are mostly managed by their headquarters, making it difficult to charge according to local standards. The platform usually formulates charging plans with the brand headquarters, and the specific amount and how it is derived remain complex.

Behind the fee reform, it is not hard to see that Meituan, as a major player in the food delivery industry, intends to promote the transformation of the catering industry—Meituan wants to guide the construction of a better and more scientific food delivery ecosystem, increase the profit of the food delivery model, and make the pie bigger. If this problem is not solved, involution in a system where efficiency stops improving will plant huge hidden dangers.

Unprecedented Challenges

Wang Xing repeatedly mentioned the word "resilience" in the earnings call, and also repeatedly mentioned the pandemic, expressing that Meituan "withstood challenges from various adverse factors and achieved growth."

Objectively, Meituan's "challenges" are indeed enormous. On one hand, "cost reduction and efficiency improvement" has become a common phrase within the company. At the same time, as a listed company, it needs to find new growth points—to this end, the company bears huge losses, investing profits from food delivery and in-store businesses and still suffering massive losses.

Zhang Peng, founder of GeekPark, attended Meituan's Hong Kong listing ceremony. He recalled that when Meituan listed in Hong Kong, Wang Xing seemed to deliberately treat the listing as a process rather than a celebratory endpoint.

I believe that his goal at that time, in the direction of "eating better, living better," was certainly not limited to single-digit percentage optimizations in food delivery and in-store businesses each year. But today's environment will undoubtedly severely test his ambition and the re-planning of his path forward.

On the other hand, even improving the thin-margin model of the food delivery business remains fraught with difficulties. The platform must make the pie bigger to benefit all players in the game, while also considering whether even a slight increase in its meager profits could negatively impact the industry ecosystem and corporate image.

In the past, Meituan attempted to build a broader-coverage, high-quality, low-price instant delivery service, benefiting small and medium merchants and consumers alike, and ultimately the platform also benefited.

During the golden decade of mobile internet, everything seemed smooth—capital was a teammate, subsidies drove rapid market maturation; the economic environment was also a teammate, as merchants operated well, riders were a new profession, the "gig economy" was popular, and multiple parties could jointly benefit from the incremental growth of food delivery—this complex small system, driven by a more complex larger system's "ever-improving" trend, maintained an effective balance among multiple parties.

But changes in the environment broke this balance. Most directly, under the new normal of the pandemic, merchants' survival pressure increased sharply; under the new policy environment, platforms may bear new costs such as riders' occupational injury insurance, making it extremely difficult to reduce delivery costs in the short term. Contradictions within the small system began to surface.

"On the surface, Meituan seems to have a strong voice and can set rules, but in reality, its control is limited," a food delivery industry supplier told GeekPark. "Regarding fees, the water level it sets must never be lower than the industry's minimum ecological line. It must ensure that merchants and riders can obtain corresponding benefits on this platform, otherwise, when the lips are gone, the teeth will be cold."

For example, in the cost structure of the catering industry, rent, raw materials, and labor costs account for the majority. After the pandemic, a large number of catering companies closed due to rent pressure, and food delivery became a "lifeline" for some restaurants.

According to the Jiguang "2021 Food Delivery Merchant Research Report," during the pandemic, the overall revenue of the catering industry in 2020 decreased by 16.6% year-on-year, while online food delivery revenue increased by 13.3% year-on-year. The proportion of online food delivery revenue to catering revenue increased from 12.4% in 2019 to 16.6% in 2020.

As food delivery becomes an increasingly important revenue segment in the catering industry, the cost increase brought by Meituan also becomes part of the cost pressure. For small and medium merchants, after subtracting rent, raw materials, and labor costs from the revenue of a low-priced meal, and adding technical service fees and delivery fees, profits become even thinner.

A larger business volume is a stronghold when the environment is good. In times of storm, it means heavier social responsibility, an unavoidable "two sides of the same coin."

In 2021, Meituan changed its LOGO from a running kangaroo to a more cartoonish and "cute" kangaroo head, no longer emphasizing speed but pursuing affinity.

Facing the catering industry crisis, on March 1, Meituan Waimai released a series of measures to help catering merchants reduce costs and increase revenue. From March to December this year, for small and medium merchants in pandemic-hit medium- and high-risk areas, Meituan Waimai will implement a 50% reduction in technical service fees (commissions).

Although Meituan has made some adjustments within its power, a system that is large and precise to a certain degree is often both powerful and fragile.

In the business model seemingly dominated by Meituan, every participant can affect the whole. Meituan is just one player, and it shares losses with others, also trapped together in a larger external system.

The real challenge Meituan faces, in the long run, is not local optimization within the system. To achieve the mission of "eating better, living better," it urgently needs to write a new system—perhaps Meituan's current investment and layout in robotics can ultimately point to a new path, and building a new road is the only way to end the "tightrope walking" situation.

Meituan's senior executives often emphasize within the company that Meituan is a technology company that "pursues truth with science and technology." This ultimately needs to be understood and believed by the outside world through "better" results.

Are you "watching" me?