By: Guixiang Lv
On October 8, China’s two major internet platforms, Dianping and Meituan, announced a strategic cooperation through which both companies will join forces to enhance their respective market position and growth prospects. After the merger of the two internet platforms, the new company’s market share will be more than 80%. Over the longer term, an industry consolidation may have the effect of improving profit margins in local services. Investors are getting more concerned about the intensifying competition and unproven business model. A merger likely improves the outlook of this sector. Whether it is Dianping and Meituan, they are facing financial difficulties. An important question for the investors in these companies is that the market is not clear. Also known as O2O, the market has been characterized by intense discounting and costly marketing.
Who are They?
Dianping is China’s largest O2O (online to offline) platform for urban and lifestyle services. Dianping is headquartered in Shanghai, China, with established branch operations in 250 cities nationwide. Dianping has been described as Yelp in China. In the first half of 2015, their proportion of market transactions amounted to 29.5% of total industry activity. Meituan was founded in March 2010 in Beijing as China’s first group buying website. Meituan is headquartered in Beijing, China, with established branch operations in over 1,100 cities nationwide. Meituan has been described as Groupon in China. Their market share is over 50%.
In the Future
The combined company commands an 80% market share, and a valuation of more than 15 billion US dollars. After the merger, will the company continue to maintain business growth? I don’t think they will be able to do so. They cannot continue to maintain business growth because they will face more organizational problems. Who will lead the team is the first problem to be solved. Over the years, although the two companies were competing and had different focuses, they have to build a new team and a new brand. In the short term, they may not be able to complete their business goals. However, they still have a strong market share to protect their profits. This is good for Dianping and Meituan because they can extract resources to expand new business immediately. They can expand into the entertainment industry or social media. Dianping and Meituan could use their customer base to establish a new brand. This matters because a new brand could bring more investment. As of November 4, 2015, Internet giant Tencent plans to invest $1 billion into Meituan-Dianping, which could become one of the world’s most valuable startups. Some benefits of the new brand have already been achieved, and it is less than a month old.
A Separate Payment Platform
Here’s what you need to know: one investor of Dianping is Tencent. One investor of Meituan is Alibaba. Alibaba and Tencent are China’s largest Internet Company. These two Internet companies provide the payment platforms for Dianping and Meituan. Although they have more than 80% market share and excellent service, customers are stuck with these two payment platforms. To establish a separate payment platform is conducive to long-term development. A separate payment platform can get rid of the company’s dependence on Alibaba and Tencent. They can set up their own complete organization. Perhaps in the future, they will be able to challenge these two Internet companies.