China’s platform economy has the sword of Damocles swinging above its head
Last week, 14 government agencies in China jointly issued the “Notice on Several Policies to Promote the Recovery of Difficult Industries in the Service Sector”. (Hereinafter referred to as “the Notice”) The Notice stated that in order to support the restaurant and catering industries, employees of such enterprises will be subsidised for no less than 50% of their regular COVID testing in 2022.
In addition, the Notice stated that take-out platforms and similar platform companies will be guided to further reduce merchant service fees to lower the operating costs of catering enterprises, especially businesses which were impacted by COVID.
After the Notice was published, Meituan, one of China’s biggest platforms for food delivery and other daily services, saw its shares drop 14.86%, amounting to HK 200 billion yuan in loss. Meanwhile, Eleme, Meituan’s biggest rival, owned by Alibaba, has also suffered a loss, albeit somewhat insignificant comparing to Meituan. Eleme’s share price rose nearly 1% in the morning and quickly fell 3% after the policy was released, closing with a 0.9% drop.
While platform operators such as Meituan and Eleme don’t solely depend on their food delivery services (by far their most prominent and most profitable) — they have grown to become more like super apps, incorporating services such as retail, hotel booking, ticketing, grocery buying, ride-hailing, and others. For example, according to their 2021 Q3 earnings report, Meituan’s food delivery business generated 26.485 billion yuan in revenue, accounting for 54% of its total. Out of the total revenue of food delivery services industry, commission fees accounted for 88%, reaching 23.22 billion yuan.
The Notice is not the only regulatory sanction for platform operators. On October 8 last year, China’s General Administration of Market Regulation (GAMR) imposed administrative penalties on Meituan for its “pick one from two” monopolistic behavior with a fine of 3.442 billion yuan.
In addition, the GAMR and other seven departments jointly issued the “Guidance on The Implementation of Responsibility of Internet Platforms to Effectively Safeguard the Rights and Interests of Food Delivery Workers”, to protect the legitimate rights and interests of food delivery workers. The document put forward a full range of requirements. It stated that delivery workers should be protected with minimum wage requirements as per law, be offered social insurance, and allowed to be incorporated into established workers’ unions.
As pressure from regulators mount, with COVID still continuing to impact the daily lives of people in China, platform operators are forced to confront their sword of Damocles which has been dangling over their heads for quite a while. Restaurant and catering businesses, as well as food delivery workers, have long complained about how platforms’ high commission rates are sucking them dry.
There have long been outcries from restaurant and delivery workers on China’s social platforms. As early as April 2021, 33 restaurant associations in Guangdong jointly issued a “Joint Letter of Representation to Meituan”, which mentioned that Meituan’s commission rates continued to grow, rising from 1.1% in 2015 to 12.6%, and the commission for new restaurant merchants was up to 26%, which has greatly exceeded the threshold endurable by the majority of restaurant owners. A year after the letter, Meituan implemented a new rate model called “Rate Transparency Reform”. Notably, Meituan’s net profits for its 2021Q3 (post-reform era) food delivery business was only 876 million yuan, amounting to a profit margin of only 3.3%. Under the current operating model, it would be nearly impossible to lower the commission rate further without incurring a loss.
Notably, on February 23, five days after the Notice was initially published, China’s Economic Daily published an article interpreting the Notice and the market’s reaction to it. According to Economic Daily, “Downward adjustment of service fees may affect the valuation logic of the platform economy, but it does not mean that the prospects of such platform companies are dim. Right now, the service industry is trapped not only by the cost of commissions, rent, labour, and other liabilities, but also by the lack of willingness of the population to consume, the latter of which may be more critical.”
Economic Daily’s interpretation of the Notice seemingly postponed the looming regulatory threat. Meituan’s shares price rebounded after the article was published by more than 7%, with its market value soaring nearly HK$80 billion. Still, the closing gain only narrowed to 3%, slim when comparing to the plunge last week.
The sword of Damocles is not going away by itself. China’s platform economy will eventually need to adjust with guidance from regulators, in order to adapt and grow in a more healthy and sustainable manner, and not at the cost of exploiting restaurants and delivery workers either. Such a balance is difficult to strike, but work will continue in search of it.