Groceries Help Meituan Grow Into One of China’s Biggest Tech Companies

Shares in Meituan, which went public in September 2018, have more than quadrupled in the past year. They surged 4.9% Wednesday to close at a record high of 414.20 Hong Kong dollars, the equivalent of $53.43.

Meituan runs an app that enables users to order a variety of real-world services including meal delivery, as well as hotel, flight, taxi and restaurant bookings. It is also one of the contenders in what is dubbed community group buying—a fast-growing e-commerce niche in China where people band together to buy food and household goods at better prices.

Valuations for all kinds of online businesses in the U.S. and China have soared, as investors have placed an ever higher premium on growth coupled with economic resilience.

Analysts say Meituan’s chances of cracking the grocery business in China have been a reason for its rise in recent months, even as the industry’s breakneck growth has drawn the attention of regulators.

“The company’s new initiative in grocery group buy is what has excited the market,” said Jialong Shi, China internet analyst at Nomura.

Stock in Pinduoduo Inc., another Chinese player vying for a top position in group buying, has also surged recently, putting the U.S.-listed group’s value above $200 billion.

Chinese consumers, especially those in smaller cities, started to embrace buying fresh food online during the pandemic, opening up a big untapped market for e-commerce groups.

These transactions are often facilitated through group buying, organized by a community leader such as a convenience-store owner or the managers of an apartment block. These leaders run chat groups for customers, promoting products and pushing links to deals.

The explosive growth of group buying has already drawn official scrutiny. Late last year, China’s competition regulator summoned Meituan and five other companies to tell them it was keeping a close eye on the nascent business. It warned them not to engage in predatory pricing, misuse consumer data for profit or sell fraudulent products. But analysts are optimistic this will on balance benefit the industry, by preventing overly aggressive competition on price.

Business models vary for online grocery services. In Meituan’s case, customers place orders through the company’s app and collect goods from the community leader, for example from that organizer’s convenience store. The setup saves on delivery and customer-acquisition costs, said Sandy Lim, a fundamental research analyst for S&P Global Ratings, helping make it profitable and financially sustainable for Meituan.

Robin Zhu, an analyst at Bernstein Research, estimates that China’s annual retail spending on groceries totals the equivalent of $1.3 trillion and that only 11% of sales were transacted online in 2019. “This can be a very profitable business in the medium term,” he said. Mr. Zhu said Meituan’s record in tapping other growth markets gives it a good chance of success here.

More broadly, analysts say Meituan’s wider variety of businesses should benefit as China’s economic recovery gathers steam. Economists expect China to grow by 8% or more in 2021 as domestic consumption strengthens, with discretionary-spending-led sectors, such as travel and leisure, likely to fare best.

Still, Meituan’s heavy outlays on group buying and other fledgling businesses means the group is only narrowly profitable. Analysts polled by FactSet expect it to eke out the equivalent of $860 million of net income for 2020 and $2.1 billion of profit for the following year. Its stock trades on a hefty 142 times forecast earnings.

Even if tighter official scrutiny doesn’t hold the industry back, Chinese authorities clearly have mixed feelings about recent developments. A commentary in the official People’s Daily in December urged Chinese tech companies to focus on cutting-edge technology rather than engaging in fierce competition over online groceries. It exhorted entrepreneurs to think about “the infinite possibilities of the future”.

“Don’t just think about a few bundles of cabbage, the online traffic driven by a few pounds of fruit,” the commentary said.

Write to Chong Koh Ping at [email protected]