Chinese authorities have recently ordered food delivery platforms to reduce service fees levied on restaurants to lower the operational expenses of food & beverage companies.

This news sent dining and delivery giant, Meituan’s stock spiraling down by 15% on Friday, wiping out nearly USD 25 billion in market value. Meanwhile, Alibaba, which owns Meituan’s rival Ele.me, saw its shares plunge by 4%.

Notably, the volume of people ordering food online increased twofold to around 400 million people from 2016 to 2020. The boom was primarily due to the generous subsidies given by China’s food delivery firms for consumers and businesses.

Meituan and Ele.me soon gained a stronghold in the market and started charging fees to merchants. However, the newest regulatory requirements for reducing service fees are about to squeeze their profit margins.

This latest directive was given by China’s National Development and Reform Commission to allow struggling service industries to recover. The new regulation is likely to erode the profit margins of most internet giants in the long run.

As per sources, 60% of Meituan’s revenues came from commissions during the quarter ended September 2021. The firm also receives commissions from hotels, although food delivery is its largest revenue driver.

In the case of Alibaba, food delivery has been one of its major revenue streams since it purchased Ele.me in 2018, but e-commerce is still the behemoth’s primary business.

On a dire note, China’s food delivery platforms have been facing several changes that might undermine their profitability.

An article that went viral in 2020 accentuated the high-stress environment that made the lives of millions of food delivery workers difficult. Efficiency-optimizing algorithms that don’t consider the human capacity and road accidents mean that riders are often running the light to complete their assigned tasks.

Source Credits –

https://techcrunch.com/2022/02/20/end-of-chinese-food-delivery-platforms-runaway-growth/