Can Kuaishou copy homework and become the "Pinduoduo" of local life?

Of the three remaining strong teams in the “Hundred Regiments War” (Meituan, Nuomi, and Dianping), only Meituan is now left. However, Meituan is not “alone” - with Kuaishou’s high-profile announcement of its performance, the tense “war” in the local life market seems to be pulling Meituan down.

Not long ago, Xiao Gu, senior vice president of Kuaishou and head of the local life business unit, proudly stated at an event that Kuaishou's local life business, which started in October 2022, has seen business trends in the past year and has also run a successful business model.

Data released by Kuaishou also showed that in Q4 2023, the number of users placing local life orders increased by 23 times year-on-year, GMV increased by 25 times year-on-year, and the average daily number of paying users of local life business increased by more than 40% month-on-month.

On the surface, Kuaishou's performance growth is amazing. But behind the numbers, how good is Kuaishou's local life? In the competition with Douyin and Meituan, can Kuaishou become the "Pinduoduo" of the local life market?

TikTok breaks into local life

The general trend of the world is that after a long period of division, there will be unification, and after a long period of unification, there

After the "Hundred Groups War", with the acquisition of Nuomi.com by Baidu and the merger of Meituan and Dianping, the local life "in-store" market became Meituan (more than 80% share) and others. Today, Meituan no longer has an absolute monopoly share, and Douyin, Xiaohongshu and Kuaishou have set off a "war of kings".

On January 2, 2024, the Douyin Life Service official account released the "2023 Annual Data Report (Full Version)", which showed that in 2023, Douyin Life Service stores covered more than 370 cities, and more than 4.5 million physical stores achieved business growth. In the data report a year ago, the data of Douyin Life Service was "more than 1 million cooperative stores, helping more than 280,000 small and medium-sized businesses to achieve revenue growth."

In contrast, according to media reports, Meituan only had 4.4 million online merchants from 2010 to 2016. It took only two years for Douyin to develop 4.5 million physical stores from its entry into local life in 2021. Its speed of expansion makes it difficult for Meituan not to feel the crisis.

In fact, the reason why Douyin was able to quickly break into the local life market was mainly due to two things.

First of all, Douyin’s strategy to attract merchants is very simple - it starts with the “0 service fee” card. It was not until June 1, 2022 that Douyin began to charge software service fees for life service businesses, and at the same time provided an incentive policy of returning 50% of the software service fee (excluding 0.6% payment channel fee) to compliant merchants, and provided a protection policy of returning up to 100% of the software service fee (excluding 0.6% payment channel fee) to eligible small and micro merchants and merchants in areas with severe epidemics. It was not until February 2023 that the Douyin life service software service fee refund ratio was significantly reduced to 5%.

In addition, Douyin and Meituan have completely different paths for attracting users to complete consumption conversion. Meituan users often have consumption intentions first, and then make consumption choices after screening tastes, reviews, etc. On Douyin, users are often "planted" by content recommended by merchants or videos of experts exploring stores, and then they have consumption intentions.

The considerable traffic and potential revenue growth brought by this kind of content marketing are also important factors in attracting merchants to settle in. According to the Douyin Life Service Report, the number of group buying influencers settled in Douyin increased by 2.89 times in 2023, and influencers’ store visits helped physical merchants increase their revenue by 94.6 billion. Compared with last year, the transaction volume of short videos increased by 83%.

Meituan’s “Defense”

As a winner on the battlefield, Meituan is still seen as an industry giant by the outside world. Not long ago, due to the favorable impact of its 2023 fourth quarter and full-year financial report (full-year revenue of 276.7 billion yuan, a year-on-year increase of 25.8%, and net profit of 13.9 billion yuan), Meituan's stock price also ushered in a wave of continuous rise.

Although good financial reports can enhance the confidence of the capital market in Meituan, it is more important to deal with the "siege of princes". In February 2024, Meituan carried out a new round of organizational structure adjustments and integrated a number of core local business-related businesses.

Meituan executives explained: "On the one hand, the two business teams of food delivery and in-store and wine tours can work more closely together to provide better services to merchants, create more value and improve their operational efficiency. On the other hand, the integration of the teams can help us better identify consumer needs, enhance Meituan's product and pricing competitiveness, and improve consumer experience, reinforcing the consumer concept that Meituan is the preferred platform for local services."

The reason for this is that the overlap between Meituan and Douyin is too high. According to the "2023 Local Life Service Industry Insights" released by the third-party agency QuestMobile, the scale of overlapping users between Douyin and Meituan exceeds 300 million, accounting for 81% of Meituan's total users.

Regarding Meituan's strategy to win over merchants and users, an employee of the store business group told Jingzhe Research Institute that the pressure from Douyin is great, and Meituan has less time to defend and counterattack. "We can see that the trainers (for merchants) are traveling more frequently after the New Year. Basically, they are not seen at their workstations for several weeks. Moreover, they go not only to first- and second-tier cities, but also to new-tier cities such as Luliang and Yulin."

However, in the view of Jingzhe Research Institute, this move by Meituan may not be a defensive move against the increasingly fast-growing Douyin. After all, the two are completely different in terms of user usage logic, so Meituan's expansion of new market lines is largely a natural business expansion or a long-term market strategic layout, not a real defensive move against Douyin.

In addition, sinking to lower-tier cities is another strategy of Meituan. According to reports, in the second quarter of 2023, Meituan's store business expanded the direct sales model nationwide, replacing the previous agency operation model in low-tier cities. The benefits of expanding direct sales are also very intuitively reflected in the financial report: in terms of store hotel and travel business, in 2023, Meituan's holiday bookings hit a record high, and achieved a year-on-year growth of more than 100% in GTV. The annual transaction user growth exceeded 30%, and the annual active merchant growth exceeded 60%, both of which hit record highs.

Meituan management said: "Although the investment has affected our short-term profitability, the return on investment will significantly benefit the long-term development of the business."

Compared with Meituan's downward strategy, the industry is more concerned about how Meituan can "stabilize" merchants. A person close to Meituan said that merchants value traffic more than discount rebates, and they will favor whoever provides more traffic.

Therefore, Meituan chose to invest more in marketing to continue to consolidate its current scale advantage. Meituan, which has achieved rapid growth in low-tier cities over the past period of time, has collided with Kuaishou, which also targets low-tier markets. From this point of view, although there is an obvious gap in size, it is Kuaishou that is truly in direct competition with Meituan.

Quick copy of homework

When Meituan and Kuaishou signed a strategic cooperation agreement in 2021, they probably did not expect that Kuaishou's local life business would grow so fast.

Data shows that the user scale of Kuaishou's local life new-tier cities (third-tier and below) will increase by 545% in 2023. The average monthly shopping amount of old iron users who have placed orders on the Kuaishou platform exceeds 1,000 yuan, and the average daily usage time of active daily active users exceeds 2 hours.

Kuaishou relies on two main strategies to achieve high growth rates. The first strategy is to learn from Douyin and build a good infrastructure.

In terms of content, Kuaishou has launched the "Flying Bird Plan", which provides billions of traffic, tens of millions of cash, hundreds of thousands of good products, and hundreds of training sessions. It also provides exclusive subsidies to local group buying experts to encourage the production of high-quality local life content.

As of December 2023, the number of Kuaishou group buying influencers increased by 191% year-on-year. In 2024, Kuaishou will continue to launch the "Fuyao Plan" and "Starlight Agency Plan" to help incubate and grow more high-quality influencers. In terms of merchant operations, the cooperation between Kuaishou and Meituan not only allows Kuaishou users to place orders directly on the Meituan mini program, but also provides time and space for merchants to transition from Meituan to Kuaishou.

Secondly, Kuaishou has further strengthened the infrastructure of the merchant ecosystem, including: building its own merchant management system, issuing business regulations for various industries; formulating merchant support policies, reducing platform technical service fees, increasing price subsidies and traffic incentives; issuing policies for recruiting regional and industry service providers; and establishing Kuaishou's local life expert distribution system and product selection center.

In addition, in terms of technical service fees, Kuaishou only charges a fee rate of 1-2%. Starting from July 2023, it will refund 60% of the technical service fees to qualified merchants. Starting from April 1, 2024, the refund ratio will be reduced to 10%.

Data shows that as of December 2023, the number of Kuaishou's local life partner merchants increased by 277% year-on-year, and the number of brand merchants within Kuaishou's local life ecosystem increased by 417% year-on-year.

In terms of product categories, Kuaishou is more focused, mainly in three categories: catering, leisure and entertainment, and hotel and travel; Douyin has 11 categories such as food, parent-child, hairdressing, etc. Kuaishou involves fewer categories because it does not have strong cash support like Meituan and Douyin. On the other hand, Kuaishou also hopes to focus on the main consumer categories of young users to achieve rapid growth. According to the report data, young users under the age of 30 contributed nearly 40% of Kuaishou's local life GMV in 2023, and showed a steady growth trend. Young users have a strong demand for catering, entertainment consumption, and hotel and travel consumption.

Kuaishou’s second strategy to achieve high growth is to use differentiated strategies to tap into unnoticed growth space.

Kuaishou's differentiation is mainly reflected in "low price + low-end". Kuaishou's low service fee strategy gives merchants greater profit margins, and therefore it can provide users with "cheaper" prices; and the low-end strategy of sinking the market is more like Pinduoduo's "surrounding the city from the countryside" approach. Before users in low-end cities are familiar with the routine of "short video planting", it preemptively occupies their minds, allowing Kuaishou to quickly avoid places with "fierce battles" and find its own growth and development space.

The report data shows that in Q4 2023, the GMV of Kuaishou's local life in-store comprehensive category increased by 830.7% compared with Q1 2023, and the user scale increased by 682.5%. Among them, the majority of Kuaishou's local life users are from new-tier cities (third-tier and below), and the user share increased from 27% in Q1 2023 to 54.5%.

Entering the local life market, Kuaishou is not enough

Although Kuaishou has produced a high-growth local life report card, it is not worth celebrating in the eyes of the outside world. A former Kuaishou employee said that (the data) only looks good, and talking about growth rate without considering the scale base is just a routine public relations rhetoric.

Industry insiders have similar views. "Meituan's core local business division has revenue of 206.9 billion yuan, and Douyin's local life GTV (total transaction volume after write-offs) has reached nearly 200 billion yuan. Kuaishou's annual revenue is only 113.5 billion yuan, and more than 60 billion yuan of it is online advertising revenue. In terms of scale, it is not enough to serve the table," said an industry insider.

According to the fourth quarter and full-year results for 2023 released by Kuaishou Technology, Kuaishou's total revenue for 2023 was 113.5 billion yuan, a year-on-year increase of 20.5%; the adjusted net profit was 10.3 billion yuan, turning losses into profits year-on-year.

Kuaishou's revenue mainly includes online marketing services (advertising), live streaming and other services (including e-commerce). In 2023, the advertising business revenue was 60.3 billion yuan, a year-on-year increase of 23%; the live streaming business was 39.05 billion yuan, a year-on-year increase of 10.4%; and the revenue of other services including e-commerce was 14.11 billion yuan, a year-on-year increase of 44.7%. It can be seen that the growth of Kuaishou's overall revenue in 2023 was mainly driven by advertising and e-commerce businesses.

The scale of the low-tier market is certainly attractive, but Kuaishou still has to face the issue of user loyalty.

According to data released by QuestMobile, in terms of the contribution rate of online high-consumption intention user growth in September 2023, first-tier cities accounted for only 1.7%, second-tier cities accounted for 29.1%, and third-tier and below cities accounted for 44.2%. Residents of new-tier cities (third-tier and below) began to become the dominant consumer group.

This trend has not only been noticed by Kuaishou, but also by more brands. Taking consumer brands as an example, there is almost no difference between new-tier cities (third-tier and below) and first- and second-tier cities: Starbucks, Luckin Coffee, Bawang Cha Ji, Heytea, Burger King and other catering brands have already gone to lower-tier areas, and food delivery, Internet celebrity restaurants, cinemas, gyms, music festivals, etc. are also very common in these cities. In the case of the convergence of consumer brands, the only role of the platform for consumers is price comparison.

For Kuaishou, which does not involve takeout and only attracts users by "verifying coupons in stores", it is difficult to retain users through low prices in the long term - after all, neither merchants nor Kuaishou can afford such high operating costs in the long term.

"At present, Kuaishou still needs to accelerate its expansion, whether for merchants or users." An industry insider analyzed, "This (continuous subsidy) approach is difficult to sustain for a long time, and it is hard to say how long the price war can last. After all, capital still depends on profitability."

Despite the difficulties ahead, Kuaishou remains confident. In the earnings call after the financial report, Cheng Yixiao, founder and CEO of Kuaishou, mentioned that the local life business is one of the new businesses that Kuaishou is very optimistic about, and emphasized that 2023 is the real first year of Kuaishou's local life business. Cheng Yixiao also said in the earnings conference, "As a high-quality content provider, the local life business not only contributes to GMV, but also better meets user needs, contributes user value to the platform, and improves user stickiness. It is one of the new businesses we value very much."

Today’s Kuaishou is like a primary school student who is doing his summer homework. He says “I want to do again the questions that others have done”, while thinking about how to respond to the requirements of teachers and parents.

However, the market doesn’t care whether you are in an exam preparation class or have just enrolled. Everyone is equal in front of the exam paper, and there is no open book exam.