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WAR OF ATTRITION

Alibaba’s $13 billion listing will come in handy in its delivery war over China’s millennials

Drivers of the food delivery service Ele.me prepare to start their morning shift after an internal security check in Beijing, China, September 21, 2017. Picture taken September 21, 2017.
Reuters/Thomas Peter
Start your engines.

With e-commerce giant Alibaba on the verge of adding to its already hefty cash reserves, China’s cash-burning delivery app wars, involving billions of transactions and hundreds of thousands of delivery riders, looks set to intensify.

Alibaba, the owner of delivery app Ele.me, expects to begin trading in Hong Kong next week (Nov. 26), and is likely to price its shares for its secondary listing at HK$176 (US$22.48), according to sources cited by Reuters, which would raise between $11 billion and $13 billion. The new funds will add to the more than $30 billion (pdf, p. 15) it already has in cash reserves. The Chinese tech giant initially went public on the New York Stock Exchange in 2014, raising around $25 billion and setting a record for the world’s largest IPO ever.

The company has said that it will use the proceeds for three purposes (pdf, p. 387), including to drive user growth by expanding its range of online services. “For example, in addition to physical goods sold through our marketplaces, we continue to expand and promote our consumer service offering through our on-demand delivery and local services platform, Ele.me, and online travel platform, Fliggy,” said Alibaba. It’s unclear how much will go into Ele.me, as it also plans to invest the proceeds in its clouding computing and offline retail arms.

Ele.me, which Alibaba took control of last year, has been engaged in a fierce battle with rival Meituan Dianping—the top player right now, backed by social media giant Tencent—to become the dominant force in a $40 billion food delivery market. To win over consumers, each has offered costly discounts, in some cases leading to meals that are nearly free.

Along the way, Alibaba’s cost of revenue rose from around 43% of its total revenues for its 2018 financial year to 55% (pdf, p. 23) in the year ended in March 2019, partly due to “the consolidation of newly acquired businesses” including Ele.me, according to the company. For Meituan, meanwhile, the cost of its food delivery revenues stood at nearly 66% (pdf, p. 19) for its financial year ended December 2018, when it also reported an 8.5 billion yuan ($1.2 billion) net loss. However it recently posted its first quarterly profit for the three months ended in June due to strong demand for its food delivery service.

Online food delivery in China works similar to apps like Uber Eats and DoorDash, but has grown far faster due to lower labor costs and heavy discounting. There are around 350 million users of these services, mainly Chinese millennials aged between 25 to 39 who live in large cities and often work long hours, a group that is both willing and able to spend for convenience, according to a report from Daxue Consulting. Ele.me and Meituan held 43.9% and 53% of the market, respectively, in the three months to September, according to Chinese consultancy Analysys (link in Chinese), though some research firms put Meituan at around 60% of the market.

The stakes are high. China’s online food delivery market is expected to keep growing at a rapid pace. In addition, the large trove of consumer data collected through the food delivery apps is also priceless, since it can be used to analyze consumption preferences, and drive growth to other platforms. Already, the local consumer service segment, which mainly entails Ele.me, accounted for 6% of Alibaba’s total revenues for the three months ended in September, while income from food deliveries accounts for over half of revenues for Meituan, which also offers hotel bookings and other services.

Executives from Ele.me have said they are no longer willing to engage in price wars with rivals (link in Chinese). However Ele.me this year also said it would hold the line on the amount of commission it takes from merchants for bookings via its app, and keep its fees lower than Meituan—which takes around 20% of each order, some restaurants told TechCrunch.

Alibaba’s decision to push ahead the Hong Kong listing—which at one point appeared to be postponed—comes despite continuing unrest in Hong Kong, which has been engulfed in months of protests criticizing Beijing for moves seen as interfering with the territory’s autonomy. Some investors consider the listing an attempt by the e-commerce giant (and Beijing) to shore up confidence in the city’s status as a financial hub. If the shares bring in $13 billion, Hong Kong might be able to get ahead of the US’s Nasdaq stock exchange for the year, the Financial Times noted (paywall).

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