Appetite for food delivery apps wanes among small restaurant owners

For the past six years, the lives of Chi Hongwei and her husband have revolved around their 30-square-meter franchise restaurant that sells wontons, a type of traditional soup dumpling.

Located in Songjiang University Town, a suburban district of Shanghai that is home to tens of thousands of university students, they know their business model works: feeding hungry tech-savvy students, who usually use food-takeout apps to order the meals delivered to their dorms. In peak months such as December, the small restaurant is filled with the nonstop sound of notification messages emanating from the cash register, reminding Chi and her husband of incoming orders.

“Sometimes it turns out to be a little too overwhelming for us to handle,” Chi recalls, adding that the restaurant could receive as many as 500 orders in a single day.

The past five years could be considered a golden age for many such small restaurants. Many managed to amass a small fortune by piggybacking on the enormous popularity of the food-delivery apps. Not only did these digital platforms offer a new and more efficient channel to market meals, but their operators were also willing to provide them bonuses in the form of promotional subsidies.

Now it seems those days may be numbered. As Tencent-backed Meituan and Alibaba-backed Ele.me have snatched up most of the market, the idea of partnering with online delivery platforms is not as attractive as it used to be. Some small restaurant owners are turning their backs on food-delivery apps, creating their own WeChat mini-programs to take orders or reverting to distributing paper menus to gain customers.

By abandoning online channels, they can shift their focus back to higher-yield in-store guests, they say.

When Chi and her husband opened a small sushi restaurant in September, just 50 meters away from their wonton shop, they decided not to list it on Meituan or Ele.me. That decision appears to have paid off. “So far, the offline traffic is not bad,” says Chi.

Power shift

In the past, China’s food-delivery market involved several players, but it has since undergone major consolidation. It’s now effectively a duopoly made up of Meituan and Ele.me—combined, the two hold 90% of the market share, according to a report from China Tonghai Securities citing data from research firm Analysys. Meituan led the sector with a market share of around 60%, followed by Ele.me, which had around 35%, according to the report.

With the rise of smartphone penetration in China, ordering food online became popular in the early 2010s as a string of startup platforms like Ele.me, Dianwoba, and Waimai Chaoren raced into the emerging sector. Access to almost unlimited capital played a big role in helping those firms to gain early supremacy in the food-delivery market. Hefty subsidies were distributed to entice both merchants and consumers.

Early on, the merchants had leverage. To gain an edge on their competitors, food-delivery apps spent freely to enlist more restaurants, which was a crucial baseline for luring more customers. Merchants enjoyed the freedom to choose among platforms, opting for whichever service offered the most preferential policies or largest subsidies. Moreover, shops that were reluctant to adopt new technologies did not feel they were losing out because app usage rates were low.

That’s no longer the case. Usage rates are through the roof and nearly everyone in the food and beverage industry now offers a delivery option.

The dynamics between platforms and merchants took a gradual turn as market consolidation allowed the tech giants to dominate the booming sector. As subsidy-powered competition weeded out smaller competitors, the battle soon became a proxy war between Baidu, Alibaba, and Tencent.

Between 2015 to 2017, Alibaba-backed Ele.me, Tencent-backed Meituan and Baidu Waimai emerged as the largest players in the sector. The three-way battle ended when Baidu walked away from food delivery to focus on artificial intelligence. Ele.me acquired Baidu Waimai in 2017.

In 2018, a series of events solidified the dominance of Meituan and Ele.me. Alibaba took over Ele.me and merged it with the company’s local services unit Koubei in October. Tencent-backed Meituan raised $4.2 billion in its Hong Kong IPO last September.

With the landscape settling into a duopoly, the food-delivery platforms became the rule-setters, leaving merchants in a weaker bargaining position.

At the same time, the proliferation of subsidies worked to cement new food-ordering practices among consumers, offering discounts to reward them for ordering via apps.

The effect on China’s dining scene has been profound, especially on smaller venues. Restaurants now rely so heavily on takeout orders that many have effectively pivoted from sit-in dining rooms to delivery-only kitchens, or restaurants with little or no seating. Sometimes waitstaff run around filling large orders for delivery, paying scant attention to or even ignoring on-site guests.

“Food delivery is a ‘winner takes most’ market, which is why these companies invest so much in subsidies to buy market share,” said Lucas Englehardt, founder and CEO of the now-defunct food-delivery platform Waimai Chaoren. “Being the dominant player allows them to charge restaurants more, with fees that get passed along to customers.”

Such an arrangement isn’t healthy for the market, says Shanghai-based Englehardt, who is now CEO of Xixilab, a teeth whitening and aligning kits developer. He expects the trend to continue, now that the two leading platforms have gone public. “I don’t see the battle finishing anytime soon, as both have money to spend and different strengths to leverage,” he told TechNode in a recent interview.

Englehardt said that in other countries, it’s less common for companies to rely on subsidies to push out smaller players. But because neither Ele.me nor Meituan is profitable yet and neither player fully dominates the market, the government won’t limit their aggressive behavior, he added.