HONG KONG (Reuters Breakingviews) - Meituan Dianping’s recipe for success may be hard to keep cooking up. The Chinese food-delivery giant on Thursday reported its second consecutive quarter in the black. Good weather and restaurant advertising revenue helped. As global rivals have found, though, the ingredients for sustainable profit are elusive. It’s not clear yet Meituan has sourced them either.
The $68 billion outfit led by Wang Xing is on a hot streak. Revenue from its main food delivery unit jumped 40% from a year earlier, to 15.6 billion yuan ($2.2 billion), in the three months to September. Even better, improving margins helped that particular business generate another quarter of adjusted operating profit. Meituan’s other ventures, such as travel booking, ride hailing and groceries, are also strengthening. An annual net profit next year is anticipated by analysts.
The rosy outlook is a far cry from what is expected elsewhere. Grubhub shares, for example, have cratered 30% in less than a month, after its chief executive essentially declared that food delivery, fraught by destructive price-wars and high logistics costs, is a low-margin business that doesn’t scale well. Unprofitable peers in Europe are consolidating.
It’s not obvious, though, that Meituan has discovered the secret sauce. Its own turnaround partly came down to the easing of a cash-burning subsidy war with top rival, Alibaba’s Ele.me. Good weather also played a role: moderate temperatures usually mean lower delivery costs since the company doesn’t have to pay as much in incentives to drivers. With winter coming, and eateries across China already squeezed by high pork and other food prices, Meituan has said it will focus more on finding increased ad revenue rather than raising commissions or delivery fees.
The risk, of course, is that cutthroat price wars can flare up at any time, as can bad weather. And trying to squeeze too many ad dollars out of restaurateurs could drive them to competing delivery services. Before the latest results, Meituan shares had more than doubled this year. It may be overly optimistic, however, to think the company will consistently serve up the same delicious financial dish.
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