China Power | Society | East Asia

COVID-19 Exacerbates Chinese Restaurateurs’ Gripes About Delivery Platform Fees

China’s delivery platforms are “eons ahead of the U.S.” but the hurdles for restaurants are equally sophisticated.

COVID-19 Exacerbates Chinese Restaurateurs’ Gripes About Delivery Platform Fees

Meituan food delivery worker in Shenzhen, China.

Credit: Wikimedia Commons/ Capwiuejooh

Despite their rampant popularity and futuristic sophistication, Chinese food delivery platforms like Meituan, Ele.me, and Sherpa’s hold no appeal for Beijing restaurateur Ray Heng. Rather than rely on such services to compensate for a dearth of foot traffic in the COVID-19 era, the owner of Pebbles Mexican restaurant prefers to take his customers’ delivery orders directly through ubiquitous social media app WeChat. From there, he enlists general courier Shansong to bring patrons delivery-friendly items he added to his menu when coronavirus was at its peak in China.

But why would Heng avoid delivery platforms, given the heights they have reached? As Daxue Consulting analyst Allison Malmsten puts it: “China’s food delivery is eons ahead of the U.S.”

“The systems are centralized and cheap, so while opening Ele.me or Meituan’s apps you can often order from all the restaurants around you for a delivery fee of $1,” she says, before pointing out the far higher typical $10 fees for Uber Eats or Grubhub stateside.

Ashley Dudarenok, co-author of “New Retail Born in China Going Global,” notes how most Chinese delivery staff use maneuverable and light e-bikes, while their Western counterparts drive cars long distances and incur steep labor, parking, and refueling costs. She also says Ele.me drivers are pressured by rigid review systems, which penalize them RMB 200 Chinese renminbi (RMB) per poor review and RMB 1200 per complaint. Another incentive: Meituan’s Delivery Time Insurance option that costs users merely RMB 1 ($0.14), and refunds portions of fees for any late orders.

“It’s no wonder food delivery has a much higher market penetration in China than the U.S.,” says Malmsten. Indeed, even though Grubhub boasts America’s biggest food delivery market share, it amounted to merely 5 percent of the country’s population in 2018. Meituan, meanwhile, attracts 32 percent of China’s population annually.

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Such ubiquity isn’t enough to entice Heng. Using Sherpa’s  — a bilingual platform popular among expats craving Western food like his — cost the Pebbles owner 30 percent of order revenue. “I actually lost money on those orders,” he says. (The platform uses a sliding scale based on restaurant revenue for its delivery fees, according to Yvonne Sun, Sherpa’s business development director.) Heng’s criticisms echo arguments made by American restaurateurs struggling with the pandemic and delivery platforms in a recent New York Times article.

Dudarenok points out that Ele.me and Meituan are cheaper than Sherpa’s, taking around 20 percent of the revenue. But Malmsten says that still leaves “restaurants with close margins hard hit.” Such losses are all the more painful during the pandemic, according to the World Federation of Chinese Catering Industry. It reported that 65.8 percent of the nation’s restaurants saw a dramatic drop in revenue, disproportionally affecting small restaurants.

Given that economic tumult, Heng prefers to save on fees by taking charge of Pebbles’ deliveries. However, he admits managing that via WeChat text messages is challenging because “I’m always on call, even when I’m cooking.”

Delivery platforms claim to deftly handle such logistics. “Customers may have menu questions – ‘Are the vegetables cooked with pork? Is the meat halal?’” says Liu Chao, marketing director at Sherpa’s. Despite that, Sherpa’s fees amounted to too much for Heng. When he turned to cheaper platforms like Meituan and Ele.me, he felt the prep time limits were too rigid. Eatery owners can apply to the platforms for exemptions from those limits, however. Meanwhile, some restaurateurs have developed speedier separate preparation systems for dine-in and take-out or other innovations for delivery, such as adding more dishes that travel well.

Take Muwu BBQ — a chain of 150 restaurants across China that halted in-store dining in mid-February due to COVID-19, and faced monthly losses of RMB 50 million. Muwu founder Sui Zhengjun says the company then pivoted to Meituan, expanding beyond its usual on-site, large-party barbecue, to new offerings like boxed barbecued meat with rice. The new approach led food delivery to become 50 percent of Muwu’s revenue, as opposed to 5 percent pre-pandemic. With offline operations resuming in March, the chain’s revenue returned to year-over-year levels by month’s end.

Heng, however, already modified his menu to better suit take-out demands, and still found delivery platforms to be “hard to deal with.” Kenn Bermel, owner of Beijing bar and grill The Local, has a different gripe. Revenue from deliveries pales in comparison to that of dine-in customers at pubs like his because “our food costs are relatively high compared to alcohol. If customers aren’t coming in and drinking, it’s a lot harder to turn a profit.”

Such profit woes aren’t exclusive to restaurants, according to Meituan senior vice president Puzhong Wang, who said in a statement that “user experience, value for merchants, and riders’ incomes have always come before… profitability.” Cynics might dismiss such remarks, but seeing Meituan’s financial reports might change their minds. Among the highlights: the cost of drivers reaching RMB 41.04 billion in 2019, 83 percent of the company’s delivery commission income.

Dudarenok, meanwhile, points out that “franchisees, HR companies, and other third parties involved in the process are in the middle. The agent alone can even account for 25 percent of Meituan’s delivery profit.” Her conclusion: “Meituan’s deliveries are not enough to make ends meet. It has been at a loss for 5 years, and it has only been profitable in 2019.”

Those figures did not improve during the pandemic, despite some restaurateurs grousing about high fees. Instead, Meituan’s first quarter earnings announcement detailed a year-over-year revenue drop from RMB 19.2 billion to RMB 16.8 billion, citing supply and demand challenges (however, Dudarenok points out “after the resumption of work in March and April, the volume of delivery orders… has returned to nearly 80 percent of the orders before the outbreak” first began).

Such mutual hardship might offer little consolation to restaurant owners like Bermel. However, he admits that delivery platforms have proven useful for him and fellow business owners in Beijing food and drink hub Sanlitun. That’s because their neighborhood fell under strict lockdown in late June and much of July, after the COVID-19 outbreak at Xinfadi market, a major source of ingredients for restaurants across the city. Delivery provided “a bit of income” during the clampdown, but not enough to make an independent business owner like Bermel follow the Muwu BBQ chain’s pandemic playbook. “Even for venues that do a lot of delivery, if you’re located on prime Sanlitun real estate, you need in-house customers to survive,” says Bermel.

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Heng insists his hands-on delivery approach cuts costs regardless of high or low foot traffic at Pebbles (which avoided the type of lockdown Bermel had been dealt, though Heng did need to self quarantine after visiting the Xinfadi market for avocados shortly before the outbreak in June). Heng adds that his delivery set-up’s flaws can be smoothed out upon replacing the cumbersome WeChat text message orders with a more sophisticated mini-app, which he is putting the final touches on.

IT blog Walk the Chat praised those Chinese subapplications for providing “advanced features to users such as e-commerce, task management, coupons etc.” One successful adopter of such mini-apps in Beijing’s restaurant scene is Ignace Lecleir with his Hulu European style eatery. Lecleir says a mini-app set-up afforded him full control of each step of the delivery, helped him maintain high customer service standards, and prevented pandemic downturn layoffs as he trained former busboys into his very own delivery fleet.

But mini-apps and in-house delivery aren’t viable, or desirable, for all restaurateurs. Take Nemanja Maric of Beijing’s fast casual Mexican chain Avocado Tree, who says: “By not having to send our own people to deliver the food, we are able to do what we do best — serving fresh meals — and delivery platforms are able to do what they do best — sending it lighting fast.” Customers using Meituan over a specific restaurant’s mini-app, meanwhile, have access to pandemic-related features. One tags restaurants who have given their staff nucleic acid tests, while another notes which merchants are updating their sanitization and precaution information online. The platform hopes to equally entice restaurants by providing “RMB 20 billion of loans with preferential interest rates to various merchants” along with free online pandemic response courses, according to CEO Xing Wang during Meituan’s Q1 earnings report.

Senior VP Wang, meanwhile says:, “Meituan believes in… developing a future-oriented infrastructure, instead of seeking short-term profitability.”

A key facet of that forward thinking: Meituan began grocery deliveries in 2019, entering a crowded field against well-established competitors like JD Daojia and Dingdong. Despite such formidable counterparts, the venture may be worthwhile for Meituan, because concerns about restaurant safety led to a spellbinding surge of 215 percent in fresh food orders from JD during the pandemic’s outset in January. That sharply contrasts with the 6 percent decrease in monthly active users of restaurant delivery platforms in Q1 of this year. Safety anxieties resurfaced for some customers in June when a courier from Ele.me tested postiive for COVID-19.

Furthermore, Malmsten says takeout couriers “have to go through costly measures — such as contactless delivery, frequently taking their temperature, and even nucleic acid tests — to make sure the food is safe.” Based on all that, she says: “Restaurants suffered the worst during COVID-19, meal delivery apps like Meituan and Ele.me also suffered, and grocery delivery came out as a winner.”

Larry Mullin is a reporter based in China.