JD.com Seeks Place At China's Massive Takeout Dining Table

Key Takeaways:

• JD.com has signaled it’s preparing to enter China’s massive takeout dining market, most likely using its Dada Nexus local delivery service as a foundation
• The initiative is likely to do well over the longer term by targeting large chains and using existing infrastructure, but could weigh on JD.com’s profits over the shorter term

By Doug Young

China’s duopoly Ele.me and Meituan (3690.HK) looks set to get a major new competitor, as e-commerce giant JD.com JD looks for a place at the country’s massive but highly competitive takeout dining table.

Reports of the move abounded in Chinese media earlier this week, after JD.com posted an ad looking for “high quality dine-in restaurants” to join its program. Equally eye-catching were the terms JD.com was serving up, including zero commissions for restaurants that join before May 1. That should be a huge incentive for new restaurants, since Ele.me and Meituan currently typically charge anywhere from 5% to as much as 25% of the price of each order for restaurants that participate in their services.

Another interesting twist to this story comes from JD.com’s recent launch of a plan to privatize its Dada Nexus DADA subsidiary, which operates a local delivery business working with partners like grocery and drugstore chains. That network would immediately give JD.com the basic delivery infrastructure it needs to operate such a takeout dining service.

If the privatization succeeds, which seems almost guaranteed, since JD.com currently controls 63% of Dada Nexus, it’s quite possible JD.com could re-list Dada in Hong Kong to raise fresh funds to finance this new takeout delivery initiative. Like many offshore-listed Chinese companies, JD.com is showing a growing preference for Hong Kong, rather than the U.S., for listings of its various units as a hedge against growing U.S.-China tensions.

The company made its own second listing in Hong Kong in 2020, complementing its original U.S. listing dating back to 2014. It also listed both its JD Logistics (2618.HK) and JD Health units (6618.HK) in Hong Kong in 2021.

China’s takeout dining business has become all the rage over the last decade, made possible by the country’s huge number of restaurants and technology that makes centralizing delivery orders quite fast and easy. Ele.me was the first major player to enter the business and was followed by Meituan and Baidu BIDU. Ele.me already counted e-commerce giant Alibaba BABA as a major investor when it bought Baidu’s service in 2017, and Alibaba fully purchased Ele.me a year later.

That brings us to the present, where Meituan and Ele.me currently dominate the market that was worth an estimated $51.5 billion in 2023, according to one online report. Ele.me said it had 750 million users in 2023, and partnerships with 4 million restaurants, according to the report. Meituan, meanwhile, had 670 million users and worked with 6.9 million restaurants.

Alibaba’s latest quarterly report shows that revenue from its local services group, which includes Ele.me, rose 14% year-on-year to 17.7 billion yuan ($2.43 billion) in the three months to last September. The group reported a loss of 391 million yuan on an earnings before interest, taxes and amortization (EBITA) basis, though that was a big improvement over its 2.56 billion yuan EBITA loss a year earlier.  

Meantime, Meituan reported its revenue from delivery services, which includes takeout dining, grew by a similar 13% in last year’s second quarter to 23 billion yuan from 20.4 billion yuan a year earlier. Here, however, we should also note the second quarter growth rate represented a sharp slowdown from the 24.6% growth the company logged in the first quarter.

Dada infrastructure

Next, we’ll look at how JD.com is likely to roll out and expand its takeout dining business as it vies for a piece of the pie. Analysts pointed out that JD.com’s call for “high quality dine-in restaurants” shows it may want to focus on the higher-end of the business and leave the many smaller eateries that compete mostly on price for Ele.me and Meituan.

Such an approach seems smart, at least to start, as the big national chains and higher-end restaurants have better quality control and management in general, which should make them better partners for JD.com. One report notes that JD.com is already working directly with several big national chains, including locally owned Champion Pizza and Yuanji Dumpling, as well as the China operation for Burger King.

A look at Dada Nexus’ two main apps, Dada Now and JD Now, shows that the former will be the likely home for the new takeout dining service. The other major service, JD Now, currently offers mostly grocery delivery services working with big chains like Walmart, Sam’s Club, Aldi and Lianhua. Dada Now’s offerings are more diverse, and the service already offers a takeout dining channel with participation from major chains including McDonald’s and Shake Shack, as well as coffee and tea chains Starbucks, Nayuki and HeyTea.

Among the two major Dada Nexus apps, Dada Now has been growing strongly lately, while JD Now has been moving in the opposite direction. Whereas JD Now used to be the company’s dominant revenue source, Dada Now has taken over that role in the last year and now accounts for about 60% of the company’s revenue. The existence of these two separate services is the result of merger that formed Dada Nexus in 2014, and it’s quite possible that JD.com might just merge the pair into a single service following the privatization.

Investors weren’t particularly impressed by news of JD.com’s intent to challenge Ele.me and Dianping, perhaps worried by the big losses the company will incur from the move initially. JD.com’s U.S.-listed shares fell 6.1% over the three trading days after the reports, though they’re still up 52% over the last six months, much of that from a major rally since mid-September.

Even after that rally, JD.com’s stock currently trades at a price-to-earnings (P/E) ratio of just 13. That’s well behind the 25 for Alibaba, and the even bigger 45 for Meituan, though it’s about the same as the 12 for PDD PDD, which has come under pressure lately due to scrutiny of its popular low-cost Temu international e-commerce site.

At the end of the day, JD.com’s takeout dining move looks like a smart, targeted foray that has good chances of success over the longer term by focusing on big chains and using the company’s existing infrastructure. But the new initiative will also be a money pit over the next few years, which could become a significant damper on JD.com’s profits.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.