Article / 24 June 2015 at 5:13 GMT

Alibaba feeds into China's fast-food frenzy

China Watcher / Shanghai
China
  • With the Koubei investment, Alibaba can put pressure on O2O leader Dianping
  • O2O food delivery is now cheaper than restaurant dining
  • Meituan and Dianping are likely to consider a Shanghai listing

By Neil Flynn

Alibaba announced yesterday that it has partnered with its financial arm Ant Financial to invest nearly $1bn in an online-to-offline (O2O) firm called Koubei (口碑). This platform allows users to order food, as well as other services, such as cinema ticket purchases, house listings and paying utility bills. This investment will allow Alibaba to put further pressure on O2O industry leader Dianping, which is backed by Tencent.

What is Koubei?

Koubei allows users to find local services in their city, and has grown in popularity since the boom in O2O platforms began last year. Since the development of the closed loop ecosystem model last year (where companies aim to offer a whole range of services on mobile so that users would never have to use those of another company) the platforms have been the natural expansion of this model.

Beforehand, the services within a closed loop mobile ecosystem were social networking, online shopping and gaming, but O2O, as mentioned, now brings a wide range of offline services into this ecosystem. As platforms such as Dianping and Meituan grew, local services have been eager to promote their business by offering discounts and allowing for online reservations through these platforms, and have found that the foot traffic from O2O apps has grow exponentially.

Koubei has been integrated into the Alibaba ecosystem, as users must log in with their Taobao account. This also means that users have to make purchases with their Alipay account. This is key, because although Meituan allows users to pay with either Alipay or Wechat Pay, industry leader Dianping only allows users to pay with Wechat Pay.

Therefore the investment in Koubei is important because it helps Alipay to maintain its dominant market position in mobile payments, despite Tencent’s Wechat Pay growing very quickly.  

Koubei.com
Koubei's online shopfront. Source: Koubei.com

As a food delivery platform, I find that Koubei is better than the two market leaders Meituan and Dianping. When ordering food, it’s useful to see a photo of each dish, and Koubei insists that all restaurants do this.

It seems like a logical feature, but it’s actually rather uncommon on Meituan and Dianping. Users of Dianping can view the restaurant home page and view pictures of some dishes on there, but on Meituan, users aren’t able to view photos of the food.

Alibaba and Ant Financial see this as a good investment because it allows it to effectively challenge its biggest rival Tencent. Dianping’s dominant position in the industry has benefited Tencent’s mobile payment platform WeChat Pay.

The problem for Alibaba is that Dianping has begun to expand the services that it offers, and Alibaba has to invest heavily in its O2O platforms in order to compete. The investment in Koubei will help it to compete against Dianping, alongside Meituan, in which Alibaba has already invested in.

Dianping's Services
Dianping’s three levels of service menus. Source: Dianping 


Food delivery is going mobile


Food delivery O2O has boomed in China over the past six months, and major tech firms have actively invested in their own operations and start-up firms in order to capitalise on this trend.

It’s no surprise that O2O food delivery is so popular in China. The cost of food is either the same price as in the restaurant, or is slightly cheaper, as you aren’t taking up a table during peak times.

However, the most important aspect is that the delivery fee is minimal. In most cases, the total delivery fee is 1 RMB, and it is very rare to pay over 3 RMB, although Western-style fast food restaurants such as KFC and Pizza Hut will charge around 10 RMB.

xxx
 Mobile apps which feature photos of fast food have an advantage in China. Photo: iStock

Because of such a low delivery fee, there becomes very little reason for users to leave their homes or offices to queue for food, when it is much more convenient for it to be delivered for a negligible fee.

In addition, users can pay for their delivery via the app using WeChat Pay or Alipay, and often get a 20% discount on the cost of the bill. Mobile payment platforms subsidise these purchases because it helps to grow their market share.

After the US IPO of the relatively small O2O platform Wowo, it was expected that both Meituan and Dianping would consider a US IPO during 2015. However, with the recent privatisations and re-listings on domestic equity markets, this is now in doubt. I still expect to see both firms hold a public offering, but with the valuations in China being incredibly high, it would be very difficult for these O2O firms to resist raising capital in Shanghai.

-- Edited by Adam Courtenay

Neil Flynn is is a portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.

4y
SimpleRun SimpleRun
Great article Neil. Keep them coming!
4y
Neil_Flynn Neil_Flynn
Thanks a lot

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