The New Warring Kingdoms: Pinduoduo, Meituan, Alibaba

Capwiuejooh, CC BY-SA 4.0, via Wikimedia Commons

In just 5 short years, Pinduoduo did the impossible; this little upstart with a creative business dethroned King Alibaba in 2020 with 788mn active customers vs. 779mn. This is a testament to PDD’s business model and executional capability, but is also indicative of the fragile moats in e-commerce. However, the apogee was short lived as investors confronted a double disappointment: firstly, the charismatic founder stepped down and secondly, management announced greater investments into online community grocery (OCG) group buying space, which would delay profitability for another year at least.

What is OCG? OCG is a distinctively Chinese business model that allows Chinese consumers to cut out the middleman in procuring everyday staples like groceries, particularly in rural areas with high human density but more challenging logistics. In many ways, it is an evolution of the group buying model that PDD successfully pioneered, adapted for low-margin, high volume and high frequency purchases like fruits and vegetables. It relies on the enterprising hard work of group buying leaders, who are usually stay-at-home moms in local communities, and offer up a daily variety of deals to groups on Wechat, manage orders on behalf of up to hundreds of households, and take 5-15% of the commission. In return, they are responsible for last mile delivery, as well as being the point person for any questions, returns, or complaints. Some of the harder working ones even go out of their way to deliver to elderly customers’ homes, but most of them serve as a collection point for their local communities to collect their goods. We saw 12 apples advertised for RMB 17.9, (USD 2.70) and 12 half liter bottles of water for RMB 12.8 (USD 2) on one app. No wonder the government is worried about the livelihoods of the many traditional grocery sellers in rural neighborhoods, having recently chided tech companies for investing in “a few bundles of cheap cabbage” over future innovation.

But one man’s cabbage is a tech company’s grail, and we think that the online grocery space is going to be the primary battleground for internet giants this year. This was particularly clear in this last quarter, when all e-commerce majors had future profits slashed due to planned investments in the OCG business.

Take Meituan for example. The surprise swing to 4Q loss was caused by the investment in their OCG business, Meituan Select. On the call, management pounded home an expectations reset: Meituan would have no intention of making any profits in the near term as the long term opportunities were too great to forgo. Then, right on cue, Meituan announced a record USD 10 bn equity and convertible bond offering. Internet regulations are one thing; but black hole competition can be even more unforgiving for China internet companies.

Recall what happened with the online delivery war between Meituan,, and Baidu Waimai. In 2017, at the height of the war, Meituan revealed that it spent USD 626 mn on discounts, and Alibaba pumped in RMB 1bn every month into from July to September. Actually, wars can be good for workers and customers – customers get subsidized and workers benefit from wage competition. The ones who suffer are investors and the companies themselves. To some extent, this is why the government is rather supportive of this development – cutting out waste and inefficiency and encouraging food deflation for the most rural areas would be a net benefit for social good, the cost of which would be borne by private capital. For the private players, this is the next billion dollar battleground that would get them access to the least digitally penetrated segment of Chinese society – the rural areas. This elusive but seductive TAM is what will keep players from throwing money into this space for the next few years – get them buying cabbages to capture the customer lifecycle, and as China gets wealthier they’ll be buying hotel nights in no time…

Probably the worst positioned is JD. Because of an early 700mn investment into Xingsheng, JD got trapped into the space before the internet giants moved in, and is now in a tricky spot where their margins will be compromised with little chance of success against its competitors. Their daily order volume (DOV) is only 2mn, vs. Meituan at 30mn and PDD at 27-28mn, and even BABA at 20mn+. JD also has a lot less cash to spend, but spend it must, because local players like Xingsheng and Shuihuitan (backed by BABA) still show promise on geographic demarcations, if not nationally. This is due to OCG’s reliance on local communities and leaders, where human relationships can be more relevant than the ruthless efficiency and anonymity of city logistics. That said, our money would be on Meituan. While slightly late to the game, they are already in 310 cities as of year end 2020, more than any other player (the next best was PDD, in 237 cities).

However, these wars have historically cost more and lasted longer than expectations; this war, in particular, will be one of attrition, fought in local communities and over unprecedented requirements for logistics, warehousing, and SKU optimization. In this extremely low-margin and perishable segment of e-commerce, precise just-in-time operations will make or break the profitability of the players. In the ever-dynamic world of China internet, we remain highly curious, but out of e-commerce players until the battle lines are more clearly drawn.

Disclaimer: We have no positions in any of the companies (Meituan, PDD, Alibaba, mentioned in this article.