A new study by Fudan University has found that the price war among food delivery services in China has increased the number of orders but reduced restaurant revenues.
The subsidy battle being waged by China’s food delivery giants has boosted restaurant orders but squeezed their profits, according to a new study by Fudan University that also shows that the more aggressively vendors participate, the sharper the profit decline.
Restaurants have seen average daily takeout and dine-in orders jump 7 percent since the subsidy battle escalated in July, compared with a year earlier, while average daily revenue has fallen 4 percent in the same period, according to the research results published on Nov. 21 by Zhang Jun, dean of the School of Economics at Fudan University.
E-commerce giant JD.Com waded into the food delivery business in February, sparking a price war with Meituan and Alibaba Group Holding’s Ele.me. In April, Alibaba launched Taobao Flash Buy -- a fast, local delivery service — and followed that up in July with a CNY50 billion (USD7 billion) subsidy program to boost its instant commerce business, including food delivery.
Drawing on transaction data from more than 40,000 restaurants across China, the research team analyzed the impact on merchants during two phases this year: the “heating-up period,” which ran from the launch of Taobao Flash Buy until early July, and the “escalation period” that began in July.
Assuming stable profit margins, the study showed that combined takeout and dine-in profits fell about 1.7 percent during the initial phase and by as much as 8.9 percent during the escalation period If order margins deteriorated, the drop was even steeper.
Although the subsidies have boosted orders, merchants have had to invest heavily to take part and takeout has replaced dine-in, leading to a decrease in dine-in revenue, Hu Bo, an associate professor at the School of Economics of Fudan University, told Yicai. As a result, total revenues and profits dropped, he said.
Big subsidy programs present merchants with a catch-22 situation. Participating in the campaign will lead to lower profits, but not participating will also result in lower profits, as consumers could turn to other vendors offering subsidies, the study found. Many merchants ultimately adjust their business strategies and join the subsidy war to stay competitive.
To rein in the subsidy escalation, the State Administration for Market Regulation summoned Ele.me, Meituan, and JD.Com for talks on July 18, demanding that they standardize their promotional practices, engage in rational competition, and build an ecosystem that benefits consumers, merchants, delivery riders, and platforms.
Regulators should set up an oversight mechanisms for subsidy practices, define clear and reasonable limits on subsidy use, and protect small and medium-sized merchants’ autonomy in pricing and operations to prevent them from bearing excessive subsidy costs, the study recommended.
Source: Yicai Global
