Internet darlings in China seek growth after zero-Covid

Two Chinese internet companies that emerged as corporate winners during the pandemic are adjusting to renewed competition as the country begins to shed its zero-Covid policy.

Food delivery team Meituan and cheap shopping app Pinduoduo raked in a combined profit of Rmb 11.8 billion ($1.7 billion) during the three months to the end of September as shoppers shifted to spending on delivery of food and bulk purchases of basic consumer goods.

Meituan e Pinduoduo it also grew sales 28% and 65% year over year, respectively, beating the country’s tech giants. Over the same period, Tencent’s revenues declined while Alibaba’s grew by just 3%.

But as Beijing announced sweeping easing of President Xi Jinping’s controversial zero-Covid restrictions this week, both companies are seeking alternative revenue streams.

“These are the two highest-quality companies in China’s Internet territory,” said AB Bernstein analyst Robin Zhu. “They were both nimble in the face of the Shanghai blockade,” referring to the weeks closure of China’s largest city in spring. He noted that both platforms have been quick to roll out ways to facilitate deliveries to residents stuck at home, such as group shopping services for residents of the same apartment building.

Meituan and Pinduoduo have also benefited from Beijing’s campaign to break the grip of e-commerce giant Alibaba, which has forced some merchants to sign up exclusively to its popular shopping platforms Taobao and Tmall. In the three months to the end of September, Pinduoduo’s online marketing services revenue, which includes merchants’ ad spend, grew to RMB 28.4 billion, a 58 percent increase from a year earlier.

Meituan has been able to raise its prices as competitors have pulled out and food delivery spending has soared. “Meituan’s profitability has improved during the pandemic as people have not been able to travel or leave their homes,” said Li Chengdong, head of the Haitun e-commerce think tank. “They spent more money on local services like food delivery.”

“The pandemic has undermined competition in the market,” said a former Meituan employee, who left the company amid a wave of job cuts in April. “As long as the business can deliver the food through the restrictions, it doesn’t need to have competitive pricing or better products.”

Meituan’s prominence may prove fleeting. Beijing’s regulatory crackdown on anti-competitive behavior has opened the door for new players bankrolled by rivals with deep pockets.

On Monday, Douyin, the Chinese version of social media app TikTok, announced a partnership with three companies to provide food delivery services, putting it in direct competition with Meituan.

Li said that move meant restaurants were likely to shift some of their ad spend from Meituan to Douyin.

Alibaba is also poised to fight for market share, having cut spending in recent months. “Alibaba has reduced its price war and incentive campaign to grow its food delivery business this year, which has allowed Meituan to ease subsidies,” said Zhu.

Even so, Meituan’s diverse stable of businesses means the company could still benefit from China reopening. Zero-Covid controls have hurt the hotel and travel booking segment, its most profitable business before the pandemic.

Meituan and Pinduoduo are both looking to secure future revenue streams, the former through its Yelp-like restaurant and travel directory service and the latter through Temu, a Shein-like fast fashion app aimed at Western shoppers.

Analysts said Meituan and Pinduoduo were able to make decisive moves to put them ahead of the competition during the lockdowns because the pair were still led by their founders.

Meituan’s Wang Xing is still leading the company as CEO, and while Pinduoduo’s Colin Huang has formally stepped down as CEO, he is still the largest shareholder and continues to play a central role in leading the company’s direction, according to two people close to Pinduoduo.

Insiders said Meituan made large cuts in spending and staffing that helped its profitability. In the results of an April investigation into the sector, China’s powerful cyberspace administration said tech jobs remained stable, despite its regulatory campaign and depressed stock prices.

But after submitting rosy job prospects to the regulator, “Meituan started firing people,” the former employee said. “The cuts were exacerbated because the usual staff exodus did not occur after the Chinese New Year bonuses were distributed.”

Pinduoduo and Meituan did not respond to requests for comment.

Despite Meituan’s growth and profitability, investors have been shaken by the move of major shareholder Tencent give up his share in the group, responding to pressure from Beijing to reduce the size of its Internet empire in China, according to people familiar with the decision.

The price of Meituan’s Hong Kong-listed shares is down more than 20% in the past 12 months to HK$189 ($24), while Pinduoduo’s Nasdaq shares are up nearly 50% to $91.

Pinduoduo has benefited as shoppers stranded at home have turned to bargain hunting on its successful app. But after reporting an exceptional quarter of accelerating sales growth and soaring profits, early backer Neil Shen of Sequoia Capital China, considered the country’s top venture capitalist, has decided to step off the board of directors and take part of the earnings from the bottom.

Shen last month said he would step down “to focus on my other interests and commitments.” Sequoia-affiliated entities filed to sell $390 million worth of Pinduoduo stock the same day.

The departure comes as Pinduoduo ventures into the turf of another Sequoia-backed firm, Shein, in September by launching fast-fashion venture Temu, targeting the insatiable appetite for affordable clothing among Gen Z consumers in the US. United States. The group has lavished new buyers with lucrative offers and incentives for apparel manufacturers to sign up.

“Pinduoduo will have to invest a large amount to enter this field,” said Zhu. “But the potential upside is huge, especially as US consumers switch to cheaper retailers as the country moves into a weaker economy.”