The “new C position” of the Internet economy: new challenges and winning strategies in the “local life war”

In 2024, local life services have become a new focus of the Internet economy. This book deeply analyzes the new challenges and future trends in the field of local life services, explores supply-side issues, platform competition strategies, and the key role of the credit system in improving user experience. It is recommended for readers who are interested in the Internet economy and local life services.

At the beginning of the new year of 2024, local life has taken the center stage in the latest page of China's Internet economy. Different from the previous business war narrative in which the group spent money lavishly on subsidy wars and the distribution outlets and service stations were criticized by opponents, the smoke of the latest round of local life wars has burned inside the castle.

ByteDance was the first to take action. At the end of 2023, Pu Yanzi, the head of commercialization of Douyin Group, also served as the head of life service business. Then Meituan, the absolute big brother of local life, also changed its leader around the Spring Festival. Zhang Chuan, who had been in power for 6 years, unloaded the heavy responsibility, retained some businesses such as Dianping, SaaS and cycling power banks, and handed over most of the in-store and platform businesses to Wang Puchong. Alibaba, the other leader of local life, also announced that its prince Yu Yongfu stepped down and delegated power to the actual business leaders of maps and home delivery.

The reasons for disclosing management changes vary, ranging from capital difficulties to managers' personal focus issues, but the fact that the top players in the market changed almost at the same time and on the same track can only prove one thing: almost all participants are dissatisfied with the current status of local life, but at the same time they all feel that this track is full of opportunities.

In this article, we explore what problems have arisen in the current state of local life and what will be the core of the struggle in this field in the future.

1. New Problems

First of all, we must make it clear that in terms of business segmentation, each company has a different segmentation caliber. For example, Alibaba's pan-local life covers maps, food delivery, new retail and other formats, while Meituan mainly focuses on in-store, food delivery and hotel travel. If we discuss all of them, different businesses have different entry points, such as home delivery to see fulfillment, store delivery to see write-offs, and so on. A single leaf can tell the coming of autumn. Today, we will use the in-store business with a relatively low threshold (no need to consider infrastructure barriers such as logistics and distribution) as an entry point to summarize the biggest new problem in local life in 2023: inaction on the supply side.

It is mainly reflected in two aspects:

1. Weak supply of new stores

One of the core KPIs of the in-store business team is the number of contracts signed by supply-side merchants. During this round of epidemic cycle, platform companies have embarked on two waves of bonus periods: one is the substantial increase in the online rate of catering during the epidemic, and the other is the explosion of catering entrepreneurship in the early post-epidemic period last year . However, it is obvious that both have entered a rapid cooling period. The growth rate of the online ordering market has rapidly declined from 71.3% in 2014 to 19.8% at the beginning of last year. In the first quarter of this year, the number of newly registered catering companies in the four cities of Beijing, Shanghai, Guangzhou and Shenzhen decreased by 43.96% year-on-year, and the popularity has greatly decreased.

Figure: Number of catering companies registered in Beijing, Shanghai, Guangzhou and Shenzhen in a single quarter, source: Tianyancha, compiled by Jinduan

More importantly, the elimination rate of the catering industry is increasing rapidly. According to the data of the "White Paper on China's Catering Brand Power 2023", the catering elimination rate (cancellation volume/registration volume) in the first eight months of 2023 reached 34.7%, far exceeding the same period of three years. On the one hand, the growth rate of new stores is declining, and on the other hand, the survival rate and the operating cycle are shortened. For the platform, the growth rate of B-end merchants' supply is gradually slowing down, and it can be predicted that the trend has just started, and there will be more obvious supply shortages in a certain medium and short period.

2. The low-price system is broken

Another notable phenomenon is that the homogeneity of products among merchants on various platforms is becoming increasingly apparent. We selected the group purchase packages of restaurants in Beijing with the highest sales volume from Douyin and Meituan, and found that the difference in the average customer price of the mainstream group purchase packages between the two platforms does not exceed RMB 5 (the figure shows that some Douyin platforms offer discounts of RMB 6 or less for new customers), and the discounts for new customers and payment are basically the same.

Figure: Package prices displayed on some platforms, source: Meituan APP, Douyin APP

If we look at some brands that are not promoted by the platform, the price list of the packages available for the two platforms is very consistent. In other words, in the current market environment, there will no longer be a single catering company or brand that bets on a certain platform for common growth and is willing to pay a preferential cost far below the market price for the platform. It is more like a reed in the wind, a boat in the waves, and will go wherever there is short-term profit .

In a horizontal comparison, there has also been a deep-rooted change in the brand restaurant's perception of group purchase prices. The current average price per customer in restaurants is tending to be consistent with the average price per person in group purchases. On the one hand, the increase in the number of group purchase diners may have lowered the average price per customer. On the other hand, it may also be that the prices of group purchase products launched by merchants have further increased .

If we look at the current Meituan caliber, it is more inclined to the latter. We can see from the sales caliber that no matter how much the package is sold, the average customer price of group purchases and the average merchant per capita are not much different. In other words: merchants no longer believe that the so-called low price is the rationality of everything. Behind all low-price strategies, there must be people who bear the costs. For products with high concentration of production factors, consumers pay for the monopoly after the formation of monopoly. For products with low concentration of production factors, the merchants who withdraw halfway pay for the bill, and catering is the latter.

For those in the catering industry, the low-price effect can only bring about limited customer flow and repeat purchases, and when brand merchants give up low-priced packages, they will suffer backlash, especially for non-chain local restaurants that rely on repeat purchases: old customers will assume that the restaurant has lowered its consumption quality and positioning just because it has launched low-priced packages, new customers are not effectively converted, and old customers cannot be retained, which is not worth the loss.

To sum up, the most obvious feature of the local life track in 2023 is the inaction on the supply side. Whether in terms of absolute numbers or the degree of dispersion of the interests of merchants and platforms, irreversible changes have taken place.

II. The Appearance of All Beings

Let’s first take a look at how the local business of the top players will perform in 2023:

• Meituan: Total revenue in 2023 is 206.9 billion, a year-on-year increase of 28.7%. Among the main businesses, local business commissions and online marketing grew rapidly, reaching 35.3% and 31.2% respectively, and operating profit increased by 31.2% year-on-year.
• Alibaba Local Life: Revenue for the 2023 cross-financial reporting year is 57.723 billion (Q2 Fliggy is split into others, no year-on-year impact), a year-on-year increase of 18.8%, and an adjusted EBITA loss of 10.7 billion, a reduction of 26.5%.

Figure: Meituan and Alibaba local life financial report data, source: corporate financial report

• Byte Local Life: Financial report has not been disclosed. According to data disclosed by the Bytedance City Research Institute, as of November 15, 2023, the overall GMV of Douyin Local Life increased by 256%, of which the catering GMV increased by 191%, the comprehensive GMV of in-store increased by 330%, and the hotel and travel GMV increased by a significant 435%.
• Ctrip: Net income was 44.5 billion, up 122% year-on-year; accommodation booking revenue was 17.3 billion, up 133%; net profit was 10 billion yuan, a significant year-on-year increase, up 42.9% from the same period in 2019.

From the revenue perspective, it confirms the logic that the local life track still has growth potential. The hotel and travel industry has recovered quickly after the epidemic and is also one of the sub-categories with the highest revenue contribution in the local life track. The growth rate of in-store business is faster than that of home delivery business. Let's take a look at the cost side. Where do people focus their resources (money)?

• Meituan: Marketing expenses increased significantly by 55.34% in 2023. Although there is no specific breakdown of expenses, the financial report emphasizes two points: first, the ability to display content has been enhanced, and multiple content production methods such as pictures, text, video, and live broadcast have been introduced; second, the membership system has been upgraded and simplified. Intuitively, the main capital investment cuts are content and subsidies for C-end consumers.
• Ali local life: Ali did not disclose the specific flow of local business costs, but in 2023, Ali was relatively turbulent. One of the core changes in local life was the split of Fliggy, which also indirectly confirmed that Fliggy's current products were not enough to bring significant profits. Secondly, the status of word-of-mouth was raised again. It was included in the first-level page of Alipay two years ago. In 2023, word-of-mouth was merged into AutoNavi, driving the in-store business with 700 million monthly active users. The resource tilt of word-of-mouth group buying was quite obvious.
• ByteDance Local Life: ByteDance has not disclosed its financial report. According to the data disclosure integration of the Massive Data Research Institute and Leifeng.com's summary of Pu Yanzi's management of Douyin Local Life, there are two major changes in resource allocation. One is to focus on Douyin's content traffic pool to do local business, rather than to be a pure shelf model e-commerce like Meituan. This can be seen from the logic that the massive publicity content ecology and local life are closely linked. The second is that Douyin seeks more resource allocation in the 3-5 tier markets where Meituan has a low coverage rate. This can be confirmed from Leifeng.com's report.
• Ctrip: Overall, the single-quarter rates have dropped slightly, mainly due to maintaining the basic base of business travel and hotels and further expanding overseas markets. At present, the resource allocation and business conflicts with the first three are relatively small.

Let’s summarize the resource investment of the first three in a picture: