Many have seen the food delivery service providers as the lifeline for people’s daily supplies during China’s coronavirus lockdown. Many also believed this would give the businesses a boost. They have been wrong.
Theoretically, demands for food delivery service should be on the rise. Yet there is no way to tell, as such demands never find their way into the real economy and translate into spending.
I’ll refer to the Beijing-based company Meituan Dianping (SEHK: 3690) in this article. My hope is that its experience during the coronavirus outbreak could be a reference point to the risks such “gig businesses” have been exposed to in the past months.
Investors should be aware of these risks and not jump onto the bandwagon of buying into their shares. That’s because the likelihood of a contraction in earnings is greater than ever.
In particular, this does not bode well for Meituan Dianping. The company only started reporting positive earnings for the second consecutive quarter as of the fourth quarter of 2019.
Gig economy precarious under coronavirus
The “gig economy” operates between independent contractors, freelance workers, and contract workers, and businesses looking to hire such labour.
Companies such as Meituan Dianping act as an online platform to connect these individuals with businesses. It boasts of a high degree of flexibility and is nimble in being able to adjust according to the rise and fall of market demands.
But in times of a pandemic outbreak and large-scale lockdowns, the broader economy sends waves of demand shock to individual businesses and the gig workers that work for them.
Meituan Dianping’s business is divided into three major segments; food delivery, restaurant and travel bookings, and other services such as car hailing, bike rental and groceries.
Mass closures
During the peak of the outbreak in China, that is, somewhere between late January and early March, all revenue lines of Meituan Dianping have practically come to a freeze.
Restaurants had shut their doors to customers either by government mandate or for fear of cross-infections on their premises.
Delivery drivers also became more reluctant to take the risks of infection for paid work, if there were still orders from customers in the first place.
What has taken place is a disruption across the supply chain, and a full recovery across the board could take months.
What the crisis means for Meituan Dianping…and the wider industry
This will be consequences to Meituan Dianping’s business performance for the rest of the year.
According to its 2019 interim report, 56.6% of the company’s revenue comes from its food delivery service, and hotel & travel booking is its second-largest business, taking up 23.1% of the total revenue. Both segments will experience a sizable contraction in earnings.
For its outlook in 2020, Meituan Dianping said the first quarter would bring negative revenue growth and net loss. However, it has not been able to predict the scope of the impact for the remainder of the year – this largely depends on how the situation evolves.
Besides the direct hit the business has taken so far, there is also the potential worry of increased competition in the food delivery space, with Alibaba-backed “Eleme” a well-funded competitor.
Though food delivery is a major part of Meituan Dianping’s business, it is also the least profitable of all; its gross margin of 18.7% in 2019 was up from 13.8% a year prior.
However, the issue with a thin margin is common across the industry. Meituan Dianping’s American counterpart Grubhub’s margin is in the single digits and gets slimmer over time. It remains to be seen if the company can keep the momentum of growth in its margins.
Foolish conclusion
While many have faith for the strong and continued growth of China’s food delivery services during the coronavirus outbreak, I argue that the reality is far from an optimistic one for the industry.
By no means does that mean Meituan Dianping can’t report resilient earnings in the first half of 2020. I just believe that investors need to be more cautious and patient to see the delivery of that expected performance.