January 12, 2017

China's O2O Platforms - Platforms Competing With Promos

700 HK, BABA, BIDU, TCEHY
By Meredith Sun
China’s O2O platforms have ramped up promotions during the holiday season and passed most of the costs on to vendors or increased commissions.

China’s O2O platforms significantly increased the cadence of promotions in December and have continued the promotions into January. Ele.me Inc., backed by Alibaba Group Holding Ltd., was the most aggressive, providing discounts to consumers for four of seven sources. Two sources, both from Northeast China, said Meituan-Dianping (backed by Tencent Holdings Ltd.) provided more discounts than Ele.me in their cities. The last source, from a tier-3 city, said the discount level was the same for Ele.me and Meituan. All sources said that even though discount levels increased, Baidu Inc.’s Baidu Waimai offered significantly lower discounts than Ele.me and Meituan.

One manger whose store is part of a large restaurant chain in Beijing outlined the promotional plans of each O2O platform for January:

 Meituan
  • Pay 60 yuan, get 24 yuan deduction
  • Pay 30 yuan, get 15 yuan deduction (online payment only)
  • New users get 17 yuan deduction for first order
 Ele.me
  • Pay 85 yuan, get 40 yuan deduction
  • Pay 55 yuan, get 25 yuan deduction
  • Pay 30 yuan, get 15 yuan deduction (online payment only)
  • New users get 20 yuan deduction for first order
 Baidu Waimai
  • Pay 50 yuan, get 10 yuan deduction
  • Pay 30 yuan, get 6 yuan deduction
  • New users get 16 yuan deduction if paid through Baidu Wallet or 6 yuan deduction through other online payment for first order

These discounts are entirely covered by vendors and/or the restaurants, while the O2O platforms only randomly provide consumers a 1-2 yuan subsidy. However, for large chains, such as Yum China Holdings Inc.’s KFC and Pizza Hut, O2O platforms would have to cover the cost of most discounts and promotions because of the large volume.

Sources from Beijing and Shanghai said all three platforms increased commissions by 1% to 2% during the last two months, with Ele.me being more aggressive with vendors. But for sources in tier-2 and -3 cities, commission rates remained unchanged. One source in Shanghai said, “All three platforms' commission rates increased in the past two months due to the increasing [number of] consumers on O2O platforms. Consumers’ habits have been formed, so it is time for O2O platforms to increase commission rates and earn more money.” Commission rates varied based on the restaurant's size, the service provided by the platform and whether there was an exclusive relationship with the platform. “If we do the delivery with our own staff, not by O2O platforms, the commission rates we need to pay are: Meituan 6%, Ele.me 7%, and Baidu Waimai 5%. For those who have signed exclusive deals with any one of these platforms, the commission could be negotiated down to 3% or 4%. If we use the platform's delivery service, the commissions are much higher: 20% for all three platforms. Of course for bigger chains, the commission rate can be negotiated as low as 12%.” Waimai charged vendors lower commissions than the other two platforms in two of six cities.

Ele.me outranked Meituan in tier-1 and -2 cities in terms of market share, while Meituan was stronger in tier-3 cities. Baidu’s Waimai still lagged behind, though four of seven sources said Waimai gained share during the past two months, benefiting from relatively better margins for vendors, with Ele.me losing because of aggressive discounts and increasing commissions. The Beijing source said, “Baidu's orders increased by around 2% in the past two months, and Meituan and Ele.me decreased accordingly.” Meituan and Ele.me each currently represent 35% of online orders for the source, and Waimai represents 30%. (Beijing is Baidu’s strongest O2O market.) One source from Shanghai said Baidu was gaining share as well. “We have 42% of orders from Ele.me, 39% from Meituan and 19% from Baidu Waimai. Baidu and Meituan both increased a little bit in the past two months, and Ele.me decreased,” the source said.

Contributors: Joyce Hong and Eileen Li

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