Meituan 2022Q1 Earnings Conference Call

Food Delivery – Pandemic Impact: Can you assess and share more details on the impact of the pandemic on food delivery? Are we expecting a more severe impact in the second quarter? In the current macro environment, will we pay more attention to improving customer loyalty and adjusting subsidy strategies? How should we predict the performance of food delivery in 2022?

There were sporadic outbreaks in January and February, but our food delivery business still maintained solid growth. The growth of orders around the Spring Festival accelerated significantly. However, since March, Omicron has rapidly spread in more cities, including Shanghai, Shenzhen, Qingdao and other first-tier cities. Stricter Covid-19 control policies have been implemented within the city limits. Many residential communities have different levels of epidemic prevention measures. Riders cannot deliver to their homes, which reduces the convenience of delivery and curbs the demand for takeaways to a certain extent. Non-residential venues such as office buildings, leisure venues, and hotels are also affected by the sharp drop in consumer traffic. The sharp decline in takeaway orders in first-tier cities had a significant impact on our order growth in March. Provinces such as Jilin went into full lockdown in mid-March. Compared with pre-pandemic levels, its orders have dropped by nearly 90 percent. Some second-tier cities have also adopted stricter prevention and control measures, and many cities run by institutions have suspended food delivery services.
Since April, the prevention and control measures have become more stringent in various places, and the first-tier cities with a larger order contribution are also more affected. In April, the order volume of cities in high and medium risk regions dropped significantly. For example, Shanghai started a wider lockdown at the end of March, resulting in a 90% drop in orders in Shanghai in April compared to before the outbreak. Compared to before the lockdown, the percentage of restaurants open for business was only single digits and rider capacity was only More than ten percent before the epidemic rebounded. As a result of these more prudent containment measures, low-risk or no-risk areas have also experienced some spillover effects. As a result, the growth of orders in these regions has also slowed down significantly. Overall, this outbreak is different from the outbreak in early 2020 because of the higher risk of contagion, as is the impact on business.

Given that the second quarter was more affected by the epidemic, I think the order growth in the second quarter will decelerate compared to the first quarter. However, as the epidemic was effectively contained in many places and more relaxed anti-epidemic policies were adopted, we also saw a steady pick-up in takeaway orders starting in the last two weeks of May. Residents in Shanghai and Beijing have been steadily resuming work and production since the end of May, so we expect orders to show a better recovery trend in June than in May. The third and fourth quarters will depend on how the COVID unfolds and the associated containment measures. If more high-tier cities are affected by the epidemic in the third and fourth quarters, the significant impact on the growth of food delivery orders may continue.

Therefore, during this period, we will pay more attention to high-quality growth, especially increasing the transaction frequency and user stickiness of mid- and high-frequency users. We will also optimize operational efficiency and control subsidies. By 2022, both operating profit and operating profit margin of food delivery are expected to improve year-on-year.

Going forward, I remain confident in the long-term growth of Food Delivery and Meituan’s ability to execute. During these challenging times, we have introduced targeted measures to meet surging consumer demand. We’ve also rolled out a series of measures to help businesses maintain normal operations. It also reflects the agility of our organization in executing and iterating on emergency response measures. In Shanghai, we quickly and iteratively launched a community group meal model to complement the traditional takeaway model, providing more than 400,000 group meals to about 9,000 communities. In Beijing, given the ban on eating out and dine-in since the May holiday, we increased rider capacity to 30% and offered long-distance delivery. The launch of the city-wide takeaway service has driven a surge in demand for high-priced, long-distance orders. From May 1st to 3rd, orders in Beijing increased by 30% year-on-year, and cross-city long-distance orders increased by 40%. We are confident that after this round of epidemic situation is further controlled, we will promote the recovery of consumption under the guidance of the government, so as to bring our food delivery order volume back to the normal growth track.

Food Delivery – Automated Delivery: During the recent COVID-19 outbreak, I saw Meituan send automated delivery trucks to Shanghai to help with instant delivery. Can you share more about the progress of automated shipping? What is the future development and strategy? To what extent will this help improve unit economies of scale?

Since the beginning of 2020, Meituan autonomous delivery vehicles have delivered nearly 2.2 million orders. They are assisting local governments to put into use heavily in areas affected by the outbreak. Immediately after this outbreak, we deployed automatic delivery vehicles in Shenzhen, Shanghai and Beijing, which were affected by the epidemic. From the beginning of April to May 24, we completed more than 700,000 orders.

In Shanghai, Meituan automatic delivery vehicles participated in the anti-epidemic and supply guarantee work in 15 communities including Ruijin Hospital, Fudan University, Fangcang Hospital, Oasis Cannes, Cannes Peninsula, etc., providing community residents, school teachers and students, hospital medical staff, etc. Distributed living materials, and supported the distribution of nucleic acid test samples, medical supplies and other goods within the hospital. During the recent epidemic in Beijing, in addition to maintaining the normal operation of more than 50 communities in Shunyi, Beijing, they continued to provide fresh fruit and vegetable distribution, and also cooperated with local communities to provide material distribution services for several sealed and controlled areas. In addition, Meituan’s automatic distribution vehicles have continued to operate automatic distribution vehicles during the closure of several colleges and universities across the country, and cooperated with schools to participate in epidemic prevention and control work, and delivered hundreds of thousands of supplies to teachers and students. The new crown epidemic with high risk of contagion is a special scenario that automatic delivery vehicles can cope with. The advantages of such technologies in enhancing delivery capacity in special scenarios have been highlighted in this epidemic. The vehicles can carry nearly 150 kilograms per trip, reducing distribution stress for riders and volunteers, while also reducing the risk of contamination.

In the long run, I see automated delivery as a sustainable, technology-enabled delivery method that will complement the takeaway-based instant delivery network. It includes autonomous delivery vehicles, drones and other Robotics or robotics to integrate last mile delivery systems in the air and on the ground. These innovations will better serve the needs of just-in-time delivery in residential communities, office parks, universities, open roads, and more. In the future, we hope that drones and autonomous delivery vehicles can better complement the existing delivery network, thereby structurally improving our takeaway fulfillment efficiency and unit economics, while further enhancing the user experience. And it will also help ultimately achieve our mission of helping everyone eat better and live better. In the short term, we will try to apply this technology to more scenarios, including universities, residential communities, etc. We will also try to improve operational efficiency in different environments. Of course, we will continue to strive to make our automatic distribution technology more mature through internal research and development or external investment, and explore this field for a long time to make more contributions to the industry.

In-hotel and hotel travel – impact of the epidemic: In-hotel and hotel travel is an important source of the company’s cash flow, but it is currently affected by Omicron. Can you elaborate more on the impact on the business and how it’s doing now in the second quarter? How should we think about growth and profitability for the full year?

In the first quarter, especially driven by Chinese New Year spending, our in-store hospitality business performed relatively solidly in January and February. In January and February, GTV in the in-store business was up 30%, and hotel room nights were up nearly 15% year over year. But starting from mid-March, this round of Omicron epidemic has affected more areas, including Shanghai and surrounding provinces, as well as cities such as Guangzhou and Shenzhen. High-tier cities are significantly affected, with spillover effects to other regions as well, and offline and intercity traffic is greatly reduced. And high-tier cities account for a large portion of our in-store revenue, which has severely impacted the GTV of our in-store business. The willingness of merchants to use online marketing services has also declined, so online marketing revenue in March showed a year-on-year decline. The restrictions on offline travel have a more serious impact on hotel bookings than in-store services.

Since April, Omicron has also expanded to more first-tier cities compared to the second half of March. For example, Shanghai has been affected by prevention and control measures across the board since the end of March. Since the May Day holiday, Beijing has not allowed in-store dining. Non-essential venues such as entertainment venues, gyms and other indoor and outdoor venues have suspended operations across Beijing. Other public places also require nucleic acid results within 48 hours. Not only in first-tier cities like Shanghai and Beijing, other low-risk or no-risk areas will also be affected as people become more cautious about traveling. Inter-city consumption has basically stopped, and local offline consumption has also been affected by prevention and control measures. Stores covering catering, leisure, entertainment, training, beauty, medical aesthetics, etc. have to suspend business or limit passenger flow. Residents of some communities are also unable to conduct offline activities. Therefore, the impact on the business is likely to be more severe this quarter so far, with the impact of the epidemic on the hotel and travel performance much more serious than the impact on food delivery. But a good trend worth noting is that with the steady resumption of work and production in Shanghai and Beijing at the end of May, GTV began to pick up in the last two weeks of the end of May. However, given the materially negative impact in April and May, I think the second quarter revenue from the hotel business will be down significantly year-over-year.

Predicting the performance of the business for the full year will also be difficult given the uncertainty and different pace of recovery in different cities. The recovery of the hotel and travel business is highly dependent on the epidemic situation and related prevention and control measures. In addition to our current epidemic prevention and control policies, I think the hotel business will continue to be negatively impacted in the second half of this year. Furthermore, given the current macro challenges, consumer purchasing power may take longer to recover. However, once the economic situation begins to recover and we actively participate in consumption recovery under the guidance of the government to stimulate local consumption demand, we believe our in-store business will return to a healthy growth track. During the May holiday in Shenzhen, we assisted the Shenzhen government to issue consumer coupons on our platform, driving GTV for meals and other in-store services to grow by 50% and 30% year-on-year, respectively, during the holiday. In May, Shenzhen’s overall in-store GTV also resumed a healthy growth trend. However, some store types that require a concentrated flow of people have not yet fully recovered or there are still traffic restrictions, so the recovery speed of other in-store services in Shenzhen is currently slower than that of meals.

Although the hotel and travel business is experiencing some short-term volatility, we remain confident in its potential long-term growth. Our strategy remains the same. For the in-store business, we will help accelerate the digital transformation of the local service industry, and GTV is a key KPI. We will also improve our products, content, offerings and traffic. For the wine travel business, we will focus on local tourism while increasing the penetration rate of low-star market segments. We will also continue to increase the contribution of high-star hotels to meet various tourism needs after the epidemic. For small and medium-sized local service merchants affected by the new crown pneumonia epidemic, we will actively introduce different measures to help merchants recover and tide over the difficulties together. We will also continue to assist local governments to stimulate future consumption recovery, as we have done in Shenzhen.

New Business – Meituan Flash Sale: We have seen a surge in demand for stockpiles of food and necessities during the pandemic. It seems that the impact on Meituan’s flash sale may be different from the impact on food delivery. Can you elaborate on the impact of the epidemic and the performance of Meituan Flash Sales in the first and second quarters? How should we view its performance in 2022 and potential upside going forward?

Let me start by describing the impact of the pandemic. During the epidemic, due to the epidemic prevention measures in various places, the number of merchants providing services decreased significantly, which had a negative impact on the growth of order volume. However, the overall impact is smaller than the impact on food delivery for the following reasons. First of all, during the special period, consumers are eager to stock up on daily necessities and daily necessities. For example, in Shanghai, we saw daily orders and GTV surge by around 80% and 290% for the week of March 21, respectively, compared to the last week of February. Second, the traditional logistics network cannot meet the fulfillment needs, or in some cities cannot even fulfill the fulfillment. Considering the sensitivity of time and the imminence of new regulatory measures, consumers prefer the fulfillment experience of instant delivery and choose to use the instant fulfillment network to order locally. Third, in areas where dine-in and food delivery are restricted, supermarkets and convenience stores play a more critical role in meeting daily needs. Meituan flash sales merchants were generally less affected than restaurants. We are also pleased to see that Meituan has achieved strong growth across different metrics, with Q1 orders and GTV up nearly 70% and over 80% YoY, respectively. Average daily orders in the first quarter also exceeded 3.9 million.

Overall, Meituan Flash Sale is a trusted partner that can bring “everything to home”. In this epidemic, this brand mentality of everything at home has been further strengthened. More consumers embraced and began to appreciate instant on-demand ordering. At the same time, we have further increased user traffic conversions on the platform. Our competitive advantage in merchants has also been further strengthened, and more and different merchants have joined our platform. Growth in flowers, convenience stores and other new merchant categories has accelerated significantly.

The pandemic has catalyzed a reliance on instant retail for many consumers. Therefore, as we continue to seize consumers’ instant retail minds and expand SKU categories, I expect the development of Meituan’s flash sale business will continue to benefit from the “everything at home” consumption habit. Therefore, I am very confident in the long-term growth potential of Meituan. In 2022, we remain committed to the high-quality development of Meituan Flash and expect to increase our investment compared to 2021 to allocate more resources to empower users’ minds and drive growth in our key categories. In the long run, we remain very confident in the profitability potential of Meituan Flash Sale as it is a natural extension from food delivery to more instant delivery categories. It also has the potential to achieve higher unit prices and online marketing revenue, so from this perspective, its unit economic potential is at least similar to food delivery.

New Business – Meituan Optimal: [From a numerical point of view only, the reduction in the loss of retail-related business in the first quarter is of little significance. ] Can you share with us more details about the recent performance of Meituan Select? Also, given that your core business profitability may be impacted by the pandemic, do you expect further cost reductions? What have you done in this regard, what are your strategies?

In 2022, Meituan Select will focus more on “high-quality” growth. During the last quarter, we focused on improving our supply chain capabilities and effective marketing. By providing high-quality, cost-effective holiday products, we captured the peak consumption before the Spring Festival, so GTV before the Spring Festival achieved steady growth. During the Spring Festival, GTV declined in February because the self-service site owners were closed to celebrate the festival with their families. As they return to work after the holiday, our business growth has quickly caught up to pre-Chinese New Year levels. GTV continues to grow while we continue to improve operational efficiency.

In March this year, the Omicron epidemic also affected Meituan Selection, because in the affected areas, some large warehouses and front-end warehouses were suspended, and some self-pickup site owners were unable to operate. Logistics in certain regions have also been affected. Order volumes have been negatively impacted so far in the second quarter, as well as operational efficiency. But we also see a trend of gradual improvement in some areas. I expect sales to recover quickly in these regions as logistics and supply chains recover and stabilize.

Overall, we have maintained good growth momentum during challenging times. In the current environment, we have improved our ability to handle emergencies, as well as our organizational capabilities across the chain of operations. We will focus on ourselves and lay the foundation to ensure that we provide consumers with high-quality products, competitive prices, rich and diverse SKUs, and a good consumer experience with timely delivery. Overall, we are improving operational efficiency and reducing costs in pursuit of high-quality growth. We are also iterating on operations, SKUs and user management to meet the needs of different regions. In terms of marketing expenses, we will reduce user acquisition costs with lower conversion rates. In terms of back-end fees, we also see room to drop.

I think the above measures will bear fruit in the coming quarters. But in order to scale and build user habits, we will also maintain a good balance between cost reduction and business growth. We are also confident in its long-term potential and future prospects. In the future, we will continue to evaluate the impact of the new crown epidemic, the profitability of core business and the development of community e-commerce, and will maintain dynamic adjustments to the development pace and resource allocation of Meituan and other businesses.

New business – Meituan Maicai: I saw that Meituan Maicai played an important role during the epidemic in Shanghai. Can you share more details about its operations and new models such as group buying for groceries? What’s the unit economic model like during the pandemic? How do you expect your business model and unit economics model to evolve post-COVID? What are your key strategies for this business in 2022?

In Shanghai, we actively follow the government’s guidance, strive to fulfill our social responsibilities, and mainly do three things in terms of supply. First, we responded immediately and launched a contingency plan. Because the priority right now was to make sure we had enough stock, we immediately contacted all our suppliers and expanded our supplier base, sourcing directly from the producers and delivering the goods to the front warehouse. We also predicted upcoming demand and increased inventory in each front warehouse accordingly, while iterating on fulfillment models, increasing delivery vehicles and delivery frequency.

Second, we quickly launched a centralized procurement model under the guidance of the government. This effectively solves the problem of surging demand and difficulty in procuring supplies. Therefore, we prioritized targeting areas with high community density and low delivery capacity for this model. Residents will first order goods in bulk, which will be co-delivered by drivers instead of electric vehicles as they have been in the past. It is a one-stop solution to meet the needs of consumers for various daily necessities, and it is also an effective logistics method when the ability to fulfill contracts is limited. By the end of May, we had delivered nearly 400,000 orders.

Third, we rapidly increased the number of employees in Shanghai, and mobilized warehouse employees and sorting personnel from Beijing, Guangzhou, Shenzhen, Wuhan and other places to help Shanghai. Quickly activate open source recruitment, deploy personnel support service stations in inspection and other departments, and supplement the automatic delivery vehicles from Beijing to Shanghai. Our autonomous delivery vehicles address the need for contactless delivery, increasing delivery efficiency and reducing risk to riders. After experiencing these in Guangzhou, Shenzhen, Shanghai, Beijing, etc., we have iterated our business model under the guidance of the government to better cope with such emergencies. In the future, we will continue to do our best to continue to provide stable and high-quality supply anytime, anywhere.

In view of the strong demand of consumers to stock up in areas affected by the epidemic, the unit price of customers has increased significantly. At the same time, the epidemic has also prompted more consumers to use Meituan’s 30-minute delivery service for grocery shopping. With the iteration of new models such as community centralized procurement, the overall order density and distribution efficiency will also increase.

In 2022, we will continue to enhance the operation of the front warehouse, focusing on optimizing the SKU management, customer management and logistics system, hoping to bring better user retention rate, higher customer unit price and higher order density. We will also gradually improve our supply chain and product capabilities, increase SKUs, and dynamically optimize procurement costs. Finally, we will continue to focus on improving operational efficiency, reducing logistics costs and other expenses, and gradually improving our unit economics with a long-term perspective.

Reprinted from NetEase News. $Meituan-W(03690)$

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