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China cracked down on Meituan. Now it needs the food delivery giant to feed Shanghai

April 14, 2022, 1:24 PM UTC

There are few perks to living in a Shanghai COVID-19 quarantine center, says an out-of-work DJ who has been trapped in the city’s exhibition center turned makeshift isolation facility with a mild case of COVID for the past 13 days. He and 1,000 roommates sleep in an open-air environment with beds separated only by shoulder-high partitions. He does not have access to a shower and is forced to share a few dozen portable toilet stalls with the other residents. Bright overhead lights flicker throughout the night making it difficult to sleep. But he says there is one advantage that makes the experience tolerable, and maybe even preferable to staying in his own Shanghai apartment right now: food.

“At least [the government gives us] snacks and three meals per day here, so people are quite relaxed,” notes the DJ, who declined to share his name owing to political sensitivities. He says friends outside the facility, who are holed up in their Shanghai apartments, have lacked consistent access to fresh food and groceries. “I don’t know if I can get food when I go back home,” he adds.

Shanghai’s food situation is, indeed, dire for many of the city’s 25 million residents. Since late March, Shanghai has been in near complete lockdown because of a spiraling Omicron-fueled outbreak and China’s insistence on stamping out all infections in line with its COVID-zero policies. The Shanghai government’s failure to plan for the wave has left millions without access to consistent food supplies. Neighbors are bartering with one another for groceries, and even the city’s elite have resorted to digging up bamboo shoots in the gardens of luxury apartments for dinner.

But one company is well equipped to feed Shanghai’s hungry, confined masses.

Meituan, a Chinese food delivery giant whose user base of 667 million is twice the size of the U.S. population, is emerging as a sort of lockdown savior. Its delivery personnel are whizzing around the city on electric scooters to supply whole apartment blocks with food when the government cannot. Meituan’s new, essential role and the opportunity to serve a needy public and alleviate the concerns of desperate local officials mark a sudden change of fortune for a firm that for months has been a central target of Chinese regulators. It’s a chance for Meituan to finally prove its worth to a government that has been intent on keeping it in check.

A COVID bump

Meituan was founded in 2010 by Wang Xing, a serial internet entrepreneur who started the app as a Groupon-like service that provided subscribers with discounts on restaurants. Wang transitioned to food delivery in 2013, providing restaurants and small businesses with a simple-to-use platform where they could sell their goods.

By 2019, the company had grown into China’s third-largest tech firm, making 20 million deliveries per day across China. At the time, Bloomberg dubbed Meituan the “world’s greatest delivery empire” for its massive scale and incredible efficiency. Meituan’s yellow-jacketed food delivery drivers had become a mainstay in cities across China.

Lutina Gu, a project manager at Daxue Consulting, a Shanghai research firm that produced a report on Meituan, says Wang was among the first entrepreneurs to realize that China’s large pool of cheap workers could staff a burgeoning gig economy. Compared with places like the U.S., “you just have more people at a cheaper price that can work; that’s the secret,” she says. Meituan also captured market share by being faster than its competitors to expand beyond Beijing and Shanghai into China’s third- and fourth-tier cities, she says.

With 600,000 drivers spread across 2,800 cities, Meituan was perfectly positioned to deliver food to China’s population when COVID-19 hit in early 2020.

That year, when regions across China locked down for months at a time, Meituan’s stock price tripled from roughly $100 HKD per share to $300 HKD on the Hong Kong stock exchange.

“Meituan’s meteoric stock appreciation in 2020 resulted in large part from the expectation that the high-traffic platform would benefit from the onset of COVID society,” says Brock Silvers, chief investment officer at Kaiyuan Capital.

But Meituan did not have much time to enjoy its pandemic bump.

In April 2021, Chinese regulators announced a probe into potential anticompetitive practices at Meituan and its main competitor, Ele.me, a food delivery service owned by Chinese tech giant Alibaba. Chinese regulators said Meituan and Ele.me may be harming small restaurants and customers owing to their monopoly-like dominance in the sector. Combined, the two firms account for 98% of the country’s food delivery market, with Meituan controlling a 67% share.

One month later, CEO Wang appeared to push back against the government’s probe. He posted a centuries-old poem about book burning on his social media account that internet users and investors interpreted as a sign of protest, leading to a $16 billion stock selloff. Beijing officials reportedly summoned Wang for questioning and asked him to keep a low profile during the investigation.

In October, Chinese regulators concluded the probe, fined Meituan $530 million, and demanded it end a practice known as “pick one from two,” which forced restaurants and vendors to sell via Meituan or Ele.me, but not both.

Shanghai lockdown

The fine represented just 3% of Meituan’s annual revenues, but it took a big bite out of the company’s quarterly profits. In the last three months of 2021, Meituan posted a net loss of $832 million—the equivalent of losing $10 million per day for the period.

Hong Kong’s South China Morning Post reported on April 12 that Meituan plans to slash 10% to 20% of its workforce, including employees in its food delivery and group buying divisions. Connie Gu, a tech analyst at financial services firm BOCOM International, says the cuts are related to Meituan’s recent financial troubles. China’s regulatory crackdown is giving Meituan “little choice but to downsize,” says Silvers.

Still, Meituan’s decision to axe food delivery employees is puzzling since its services are arguably more in demand than ever before because of Shanghai’s lockdown. Gu from Daxue Consulting says the disconnect is due, in part, to attempts by the Shanghai government to commandeer food distribution chains across the city instead of leaving them under the control of private companies like Meituan.

“The government was trying to supply goods to everyone for free, but they just cannot cover every single one of us,” she says.

On April 7, Meituan executives and Shanghai officials made a rare appearance at a press briefing, announcing that they were coordinating efforts to deliver food to Shanghai’s most vulnerable residents. At the briefing, Shanghai’s vice mayor, Chen Tong, acknowledged that the government’s own efforts to deliver food had been plagued by staffing shortages.

Meituan said it was ready to pick up at least some of the slack, announcing that it dispatched 1,000 workers from other parts of China to Shanghai to aid food delivery efforts. “Meituan has been there to take over,” Gu says.

In particular, Meituan’s group buying platform, called Meituan Select, an initiative that was criticized for being a $1.3 billion drag on the company’s finances last year, has become a critical lifeline for locked-down Shanghai residents who need groceries. On Meituan Select, entire apartment complexes can make bulk orders for groceries, which require less manpower and resources to coordinate than individual purchases. One Shanghai resident in lockdown recently told Fortune that his family of three had only received one package of tomatoes from the government over 10 days of isolation and instead relied on groceries his community had purchased via Meituan.

Meituan did not respond to Fortune’s request for comment.

In practice, Meituan’s services in Shanghai remain extremely limited, with some users unable to order or being charged high prices from individual restaurants or vendors. But on top of its group buying services that are up and running, Meituan’s capacity to deliver individual food and groceries appears to be improving, Gu says.

So far, the Shanghai government doesn’t seem eager to crown Meituan a hero of the Shanghai lockdown, since that would mean admitting its own shortcomings, says John Zhang, director of the Penn Wharton China Center at the University of Pennsylvania.

But if Meituan continues to step up to meet the needs of Shanghai’s hungry, frustrated residents, the lockdown may allow the firm to wriggle out from under China’s tech crackdown. “This Shanghai lockdown gives Meituan a chance to negotiate and make peace with the government,” says Gu.

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