New regulation in China to target the profit model of food delivery giants – Techdoxx

Deepak Gupta February 20, 2022
Updated 2022/02/20 at 9:36 AM

Between 2016 and 2020, the number of people who ordered food online in China doubled to 400 million. The boom was in part thanks to generous subsidies disbursed by the country’s food delivery competitors to customers and businesses. As two companies, Meituan and Ele.me, came to dominate the market, merchant fees began to increase. But a new regulatory change is about to derail its profit model.

On Friday, a group of Chinese officials announced that food delivery platforms should further reduce service fees charged to restaurants in order to lower operating costs for food and beverage companies. The news sent Meituan shares down more than 15% on Friday, erasing more than $25 billion in market value. Alibaba, which operates Meituan’s archrival Ele.me, saw its shares fall by around 4%.

The proposal came in a directive spearheaded by China’s National Development and Reform Commission, the country’s state planner, to “help struggling service industries recover.” the new rule will likely diminish the profits of the internet giants in the long run. commissions contributed up to 60% to Meituan’s revenues for the three months ending September 2021. The company also collects commissions from other types of merchants such as hotels, although food delivery remains its biggest revenue generator. Food delivery has been one of Alibaba’s main businesses following the company’s acquisition of Ele.me in 2018, but e-commerce is still the giant’s main revenue driver.

China’s food delivery platforms have faced other changes that could erode their profitability. A viral article from 2020 brought to light the high-stress environment that has endangered China’s millions of food delivery workers. Efficiency optimization algorithms that do not fully account for human capacity and roadside incidents mean that commuters are often rushing to complete tasks.

Chinese authorities have ordered food delivery platforms to improve the safety of their workers. Meituan and Alibaba have started providing riders with connected helmets that come with voice command functions so drivers don’t have to check their phones as they race down the street on their scooters. The platforms also relaxed delivery times for passengers. The challenge for Meituan and Ele.me is how to balance the well-being of the workers and the profitability of the business.

Meituan is already working to reduce its dependence on manual labor. It recently unveiled a fleet of food delivery drones that are conducting small-scale trials in various Chinese cities. The brochure is in its early product iteration stage and regulations for low-altitude drones are still taking shape in China. The economic viability of food delivery via drones has also not been proven. But automation is at least one way for labor-intensive, on-demand service providers like Meituan to test a safer, more cost-effective future.

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