A chef makes dumplings at a restaurant in Shanghai, China. While ultra-cheap deals may help delivery platforms lure users and grow their share in China’s US$80bil (RM335.67bil) food delivery market, they force restaurants into a trade-off that both drives business and undermines it. — Bloomberg
As Chinese consumers snag 14-cent coffees and 50-cent meals thanks to a fierce price war among food delivery platforms, restaurants and tea chains are counting the cost of vanishing footfalls.
The latest financial results of major listed restaurants, teahouses and cafes analysed by Bloomberg News show that aggressive online promotion campaigns took a toll on their businesses in the first half of the year, especially in the three months to June when the price war kicked off.
Dine-in-focused restaurants such as hot pot chain Haidilao International Holding Ltd and Sichuan sauerkraut fish maker Tai Er reported declines in same-store sales ranging from single digits to 20% in the first half. Table turnover rates – a key measure of operational efficiency and foot traffic – also dropped or remained flat at best, as consumers shifted toward subsidised food delivery from platforms like Alibaba Group Holding Ltd, Meituan and JD.com Inc.
While ultra-cheap deals may help delivery platforms lure users and grow their share in China’s US$80bil (RM335.67bil) food delivery market, they force restaurants into a trade-off that both drives business and undermines it. Online campaigns can flood outlets with hundreds of delivery orders in a short span, stretching staff for meager returns and risk neglecting the few dine-in customers.
That’s exactly what Shanghai restaurateur Chen Qiang is up against. Staff at each of his four noodle shops were overwhelmed by the flood of delivery orders triggered by his 24-yuan (RM14.18 or US$3.36) coupons on purchases over 25 yuan (RM14.77). By July, the rush grew so intense that he suspended delivery during the peak lunch window – 11.40am to 12.20pm – after regulars complained of slower service.
"It keeps us busy,” Chen said. "But we end up earning less, because the cheap online orders don’t make up for the dine-in customers we’ve lost.”
Rising rider costs driven by the surging delivery volume were also flagged as a "headwind” to profit margins by Yum China Holdings Inc. at its latest earnings call in August.
A beneficiary of the delivery war, the KFC and Pizza Hut operator saw its shares fall despite delivering stronger-than-expected June quarter earnings, as investors worried that cutthroat competition could weigh on future profitability.
The prolonged wave of low-priced campaigns shows no signs of easing, as platforms continue to announce new subsidies despite regulatory calls to "eliminate unfair competition and avoid malicious subsidies.” Many fear the strategy may ultimately do more harm than good – to both the industry and individual operators.
Rising expenses
Although Luckin Coffee Inc and Guming Holdings Ltd posted double-digit sales growth in the first half on the back of online orders, delivery expenses are beginning to pinch. Luckin saw that cost surge 175% in the second quarter, rising to 14% of total net revenue – up from 7% in the previous quarter.
Guming, a freshly-made beverage chain with over 11,000 outlets spread mostly in smaller Chinese cities, said its franchisees have faced mounting operational pressure in recent months. That’s because they need to pay more than usual to subsidise consumers as per delivery platforms’ requirements, on top of commissions to delivery partners and delivery fees, George Meng, the tea chain’s chief financial officer, said in an interview with Bloomberg earlier this month.
Delivery margins have been thin for franchisees of freshly-made tea chains, said Meng. Before recent aggressive promotions, it took three to four delivery orders to match the profit of one dine-in cup of tea – now it takes as many as eight, he said.
"We are on the same boat,” he said. "If they can’t survive, neither can we in the long term.”
Yet abstaining from the delivery wars was hardly a safe bet – for some businesses, it meant slipping further behind.
Chagee Holdings Ltd, which aims to become the "Starbucks of tea”, saw adjusted operating profit rise just 2% in the first half, despite a 40% jump in store count, after it opted out of promotional campaigns to preserve its premium positioning.
The pain was more visible in the second quarter: sales growth slowed to 10% from 35% in the previous three months, while adjusted operating income reversed mid-teen gains to fall 11%. Same-store sales in Greater China plunged 23%. A Citigroup report warned of continued pressure in the third quarter and cut the company’s full-year earnings forecasts.
For restaurants, there’s little choice but to play along in the platforms’ price war – a contest driven by China’s tech giants. Alibaba, once the dominant force with 85% of the e-commerce market, is now scrambling to claw back share from Meituan and JD.com in a race to deliver meals, groceries and electronics. As of July, Alibaba held 43% of China’s food delivery market, just behind Meituan’s 47%, according to Goldman Sachs Group Inc, and Jack Ma has backed spending as much as 50 billion yuan in subsidies to fuel the fight.
That explains why some restaurants accelerated their online expansion. Haidilao rolled out new single-serve offerings such as mixed rice and house-made beverages, and is planning a super kitchen just for deliveries – while ensuring its core dine-in business, built around family gatherings – remains intact. – Bloomberg
