Meituan: Exceeding the instant retail profit target is stimulated by the epidemic, and it will decrease in the third and fourth quarters (minutes of phone conference)
The following is the minutes of the conference call for Meituan-W.HK's first half of 2022, and the interpretation of the financial report can be found in the review Is Meituan Winning With Logistics?
I. Key Information from Management Reports
- The number of platform trading users over 12 months reached 685 million, a year-on-year increase of 9.0%. The average number of transactions per trading user per year over 12 months was 38.1, a year-on-year increase of 16.2%.
- The number of active merchants over 12 months was 9.2 million, a year-on-year increase of 18.5%.
- The number of instant delivery transactions (including catering takeaway and flash purchase orders) in 2022Q2 was 4.1 billion, a year-on-year increase of 7.6%. The average daily order volume for flash purchase was reached 4.3 million in Q2.
II. Q&A session
Q: What is the reason for the adjustment of business sections in this quarter?
A: We have adjusted the business classification this quarter, one is the core local business, and the other is the new business. This adjustment reflects our business strategies and the development stages of each business, and also conforms to the perspective of resource allocation.
The first section is called the core local business, which accounts for more than 70% of our total revenue and has achieved a balance of profit and loss in business model. Catering takeaway business is the main source of our active users and provides important traffic entrance and opportunities for store-based hotel and travel. The frequency of transactions that high-quality consumers use our hotel and travel services continues to increase every year. The catering takeaway business also provides additional value-added services for merchants. The flash purchase business is similar to the catering takeaway UE model and has a clear path to increase profit margins. So we integrated it in the first part.
New business is a business model that we are still exploring. It involves self-operated business, whose operation time is relatively long, and we need more time to integrate and optimize the business model. Compared with all of our local core businesses, building new business requires more resources to be invested within the company.
Q: There has been a very obvious improvement in the profitability of the core local business. What are the driving factors?
A: The improvement in profitability is mainly due to the improvement of the catering takeaway and flash purchase business UE, partly offset by the profit changes from store-based hotel and travel. The profit margins of catering takeaway are both improved month-on-month and year-on-year. In addition, Q2 of previous years was also the best quarter for catering takeaway UE. For example, we have reduced marketing expenses and made structural changes (small and medium-sized restaurants closed during the epidemic, and orders decreased). The demand for hoarding among consumers also significantly raised the AOV of Meituan’s flash purchase business.
The profit margins of catering takeaway and flash purchase may be more of a short-term result, which demonstrates our long-term potential but should not be viewed as a benchmark for the near-term.
Q: How do you view the operating profit margins of the core local business section in the second half of the year? Separated by catering takeaway, flash purchase, and store-based hotel and travel
A: Meituan's core local business department's profit margin has significantly improved, mainly due to short-term factors caused by the epidemic. The profit margin may decrease gradually each quarter after that, but the profit margin will still improve year-on-year in the second half of the year.
(1) Food delivery: The profit margin of Q3 and Q4 food delivery will be lower than that of Q2. On the one hand, we need to provide more extreme weather subsidies to riders in Q3 and Q4. On the other hand, as the epidemic situation improves and control measures are relaxed, many small restaurants with lower AOVs will gradually reopen and account for a higher proportion of the overall order volume. Therefore, our profit margin will fall month-on-month, and we will also increase user subsidies to stimulate consumption (note: implying that UE will decline in Q3 and Q4).
(2) Flash Purchase: We are still in the early stages of development, and we focus more on the speed of development than on profit margins. In order to help consumption recover, we will optimize incentive measures, maintain strategies, and build brands. Since there is still uncertainty in the epidemic situation in the second half of the year, we will continue to improve efficiency and reduce costs when necessary. We will use more efficient online channels and optimize offline channels to pursue high-quality and stable growth.
(3) In-store travel: In July, food delivery has grown positively year-on-year, and the profit margin will also rise year-on-year in the second half of the year. Demand for domestic tourism will also continue to recover in the second half of the year, and we will take advantage of the consumption demand in summer and other holidays. The profit margin should further recover to the level before the epidemic, both on an annual and quarterly basis.
Q: What is the recovery trend of the core local business sector, food delivery, and in-store travel in June? Are there any accelerating recovery trends in July and August? How do you view the growth trend in the second half of the year?
A: The food delivery order volume recovered to 10% in June. In June, the daily orders in Shenzhen, Guangzhou, Shandong, Hubei, Fujian, and other places gradually recovered. On the supply side, entertainment venues have also begun to recover.
The full-year GTV of in-store travel in June narrowed to a low single-digit percentage decline. As travel restrictions are relaxed, the tourism business is also gradually recovering. The YoY decline in June was only 10%, and since July, the epidemic situation in Chengdu, Xi'an, and Hainan has fluctuated, affecting the pace of business recovery. But with better measures in place, the order volume still grew month-on-month in July.**
In August, it continued to accelerate, with a peak of 60 million orders for food delivery. The service also performed strongly, with a YoY growth of 15% in GTV in July, and further improvement in August.
Hotel room nights still have negative growth but are better than in June, and began to increase in August. If the epidemic does not spread on a large scale in September, the core local business is expected to achieve YoY growth.
It's difficult to predict the situation in Q4, but we will focus on high-quality and efficient growth.
Q: Does the flash purchase business having a relatively high priority mean it is a core local business?
A: There will not be only one mode for online retail of fresh groceries, and we believe that flash purchase will become an important mode. The reason why it is placed in the core local business is mainly due to the following reasons: (1) Meituan's Flash Purchase business is a natural extension of our performance system, extending from catering to other categories. The model and UE of Flash Purchase are similar to those of catering takeout. Meituan Optimal Selection and Meituan Vegetable are still in the exploratory stage. They both need warehousing as a basic setting and supply chain capabilities in operation, and are very different from our core local commercial business. After several years of development, Flash Purchase has become the largest player in the instant retail industry in China.
(2) We have great advantages on the performance side, and we also have a lot of merchant resources and a strong offline promotion team.
(3) On the demand side, we have a huge number of high-quality users, established user awareness and are beneficial to us in expanding our business to instant retail. Flash Purchase business is expected to achieve higher AOV and higher online marketing revenue in the future.
Q: What is the impact of Thunder Warehouse business on Flash Purchase business?
A: Regarding Meituan Thunder Warehouse, when we wanted to achieve everything-to-home, we found that the offline retail network was difficult to meet many niche demands. Compared with offline stores, Meituan Thunder Warehouse has more product choices and higher personnel efficiency. Moreover, the online business operation mode also enables us to quickly collect consumer opinions. In the process of moving from one store to another, we also help them to operate efficiently through our digital operation system. As of June 2022, the Thunder Warehouse project has expanded to more than 100 cities and over 1,000 stores. Through Thunder Warehouse, we can better serve the younger generation and netizens, meet niche demands, and have a user retention rate better than ordinary stores.
Q: In the past, you provided some prospects for the long-term average daily order volume and steady-state profit level. Can you update the company's long-term prospects for business scale or profit?
A: We still have strong confidence in the long-term peak daily order volume and profitability of takeout. We hope to increase the revenue contribution of merchants' marketing needs and control subsidies, so that our revenue can grow faster than order volume.
In China, instant retail is at least a trillion yuan market, which is immature and has a low penetration rate. We will fully utilize our own performance network and catering takeout traffic. We believe that Flash Purchase can reach 10 million orders per day, and its business order volume and revenue will also grow faster than catering takeout.
Regarding the store-to-travel business, we believe that China's local service industry will continue to benefit from digital transformation.
The significant increase in profitability this quarter is mainly due to short-term factors, but if we continue to improve efficiency, it may be a potential that can be achieved in the long term.
Meituan hopes to create greater value for more merchants and consumers. Compared with short-term profitability, more important is long-term efficient development.
Q: The profitability of new businesses is better than expected. Is this profitability sustainable? What is the expectation for narrowing losses in the second half of this year?
A: We have improved our supply chain management capabilities, warehousing and performance efficiency, and also increased the unit price, which has a favorable impact on the UE model. For other new businesses, we will further improve operations. Under the control of the Q2 epidemic, Meituan's revenue from grocery shopping has grown rapidly, and the loss rate of new businesses is better than expected. We will focus on cost-effectiveness and high-quality growth. If the epidemic improves subsequently, the AOV and volume of Meituan's grocery business will decline.
In the future, we will continue to invest in Meituan Preferred and Meituan Grocery, and also continue to improve the operational efficiency of new businesses, with growth and loss reduction as the goal. Moreover, we have sufficient cash flow to support the development of new businesses, and we are optimistic about their long-term development. We are dynamically adjusting our business development strategy and allocating resources based on the epidemic and macro environment, the operating cash flow of core local business sectors, and the specific development stage of new businesses.
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