Meituan reported a significant 96.8% plunge in second-quarter net profit, primarily due to an intense price war in China's instant commerce sector. Despite this, CEO Wang Xing emphasized a long-term strategy focused on aggressive overseas expansion, continued investment in instant commerce, and enhanced social security for its vast network of delivery workers, signaling a pivot towards market positioning over immediate profitability.

Meituan Reports Significant Profit Decline Amidst Intensified E-commerce Price War and Strategic Investments

Meituan (3690.HK), China's leading on-demand local services giant, reported a substantial decline in its second-quarter earnings, reflecting the intense competitive landscape within the nation's instant commerce sector. CEO Wang Xing has, however, outlined a strategic response prioritizing long-term market positioning through aggressive overseas expansion, continued investment in instant commerce growth, and enhanced social security for its delivery workers, signaling a departure from immediate profitability in favor of future competitive advantage.

Second-Quarter Performance and Market Dynamics

For the second quarter, Meituan's net profit plummeted by 96.8% to 365.3 million yuan, a sharp reduction from 11.4 billion yuan reported in the same period last year. The company's adjusted net profit also saw a significant decline of 89%, settling at 1.5 billion yuan. Revenue reached 91.8 billion yuan (US$12.8 billion), an 11.7% increase year-on-year, but fell short of analysts' estimates of 93.7 billion yuan. Total operating profit decreased by 98% to 226.4 million yuan, with the core local commerce segment's operating profit contracting by 75.6% year-on-year to 3.7 billion yuan. This resulted in the operating margin for this segment falling by 19.4 percentage points to 5.7%.

This performance stands in stark contrast to Alibaba Group Holding (BABA), which reported a 78% surge in net income attributable to ordinary shareholders for the June quarter, reaching 43.1 billion yuan. While Alibaba's overall revenue grew modestly by 2%, its profit increase was largely attributed to mark-to-market changes from equity investments and gains from asset disposals, even as its local services group faced significant losses in the instant commerce segment. Alibaba's Taobao Shangou service achieved a peak of 120 million daily orders, and its instant commerce monthly active users climbed to 300 million.

The primary driver for Meituan's profitability challenges has been described by the company as "irrational competition," referring to an intense price war with rivals Alibaba and JD.com (9618.HK). This battle of discounts and subsidies has heavily weighed on industry margins across the E-commerce Sector.

Strategic Response and Market Implications

Despite the immediate financial pressures, Meituan's management has articulated a clear focus on long-term market leadership. CEO Wang Xing stated,

"Meituan is more focused on its market position in five years, rather than short-term Financial Indicators."

And further affirmed an aggressive stance:

"We will spare no expense to win victory."

This strategy involves several key areas of investment:

• Instant Commerce Growth: Meituan continues to prioritize growth over profitability in its core instant commerce segment, anticipating incurring losses in the third quarter due to strategic investments, including higher incentives and marketing.
• Overseas Expansion: The company is aggressively pursuing international markets, with its Keeta brand expanding its penetration in the Middle East and planning an entry into Brazil's food delivery market with a projected US$1 billion investment over five years. Additionally, the Xiaoxiang Supermarket has launched under the "Keemart" brand in Riyadh, Saudi Arabia.
• Worker Welfare: A significant component of Meituan's long-term strategy involves enhancing social security for its 3.36 million delivery workers. The company plans to invest 100 billion yuan over the next three years, including trials for pension insurance subsidies and the promotion of "new occupational injury" insurance, aiming to cover the entire country by the end of 2025. This initiative is expected to reduce rider attrition rates and is seen as a new competitive battleground.

Broader Context and Sector-Wide Pressures

The intense competition in China's E-commerce Sector has led to substantial investment commitments from key players. Analysts at S&P Global project that Meituan, JD.com, and Alibaba will collectively invest at least 160 billion yuan over the next 12-18 months to defend or expand their market share in food delivery and instant retail. Alibaba has announced a 50 billion yuan subsidy plan, while JD.com has committed over 10 billion yuan under its "Double Hundred Plan" to boost brand sales. This aggressive spending underscores the high stakes in a rapidly growing instant retail market, projected to surpass 2 trillion yuan by 2030.

Furthermore, the focus on social security for delivery workers introduces significant operational cost implications. Reforms mandate employers in China to pay social insurance contributions for all employees. According to internal estimates by Goldman Sachs and Meituan, contributions for approximately 800,000 full-time and part-time drivers could generate additional annual costs of about 2 billion yuan for Meituan, representing roughly 15% of its 2024 net profit. This regulatory shift could set a precedent for other technology companies within the Logistics Sector, potentially increasing operational costs across the board.

Analyst Commentary and Future Outlook

Market analysts have expressed a mixed outlook, acknowledging the short-term pressures while recognizing the long-term strategic positioning. Morgan Stanley predicts a 24% year-on-year decline in the operating profit of Meituan's food delivery business in the second quarter. Goldman Sachs estimates that the average profit per order for Meituan will decrease by 0.6 to 1.1 yuan over the next three quarters, leading to a projected 33% decline in the business's profit in 2025. Following the earnings report, Meituan's stock price experienced a decline, reaching a minimum of HK$122.3 per share and closing at HK$132.1 per share on the day of the announcement.

JPMorgan forecasts significant financial impacts from instant commerce flash purchase investments from Q2 to Q4 2025, estimating 13.5 billion yuan for JD.com, 5.6 billion yuan for Alibaba, and 2.7 billion yuan for Meituan in Q2 alone. While JPMorgan anticipates JD.com may be the first to reduce price subsidies in Q3 2025, they warn that Meituan's stock price could face sustained pressure if its market share or the industry profit pool diminishes.

Moving forward, investors will closely monitor several key factors. The intensity and duration of the ongoing price war among Meituan, Alibaba, and JD.com will remain a critical determinant of short-term profitability. The success and financial viability of Meituan's overseas expansion efforts, particularly Keeta's breakeven target in Hong Kong by fiscal year 2026 and its market penetration in Brazil, will be crucial indicators for future growth. Furthermore, the broader impact of social security reforms on operating costs across the E-commerce and Logistics Sectors in China will be a significant area of focus, as will whether Meituan's long-term strategy of prioritizing market position over immediate financial returns yields sustainable competitive advantages.