China's instant retail war reshapes online

China's meal-delivery subsidy war has ebbed, but its legacy is a fundamental shift in consumer expectations. Electronics, flowers, and medicine can now be delivered within an hour of ordering, creating a new online shopping battleground called instant retail.

Analysts say the bigger bet for companies like Meituan, Alibaba, and JD.com was on altering shopping habits. This is especially true in large cities where consumers increasingly expect goods like groceries and cosmetics to arrive within 60 minutes. While drink and meal delivery drive frequent app visits, the larger opportunity lies in converting those visits into purchases of higher-margin non-food items.

"Quick commerce has fundamentally reshaped consumer expectations around convenience and reliability," Meituan chief financial officer Shaohui Chen said. "It is an irreversible lifestyle shift."

Market size and consumer shift

Ministry of Commerce research shows the instant-retail market is set to be worth 1.2 trillion yuan (US$178 billion) by year-end. It is projected to grow at an average annual rate of 12.6 per cent through 2030.

Beijing resident Jiang Yanxin exemplifies the new consumer behavior. She recently ordered a "Niu Lai" doll while traveling to meet friends for lunch. A courier delivered the item to the restaurant by the time she reached her table. "I'm used to shopping this way now," Jiang said. "When I think of something, I buy it and get it right away."

Analyst Ed Sander of the China Digital Retail Report said big-city consumers are already accustomed to instant retail. "This is why platforms are so enormously focused on winning the instant retail market, because it's going to cannibalise traditional channels," Sander said.

The cost of competition

The fierce competition drew government scrutiny. The market regulator summoned Meituan, JD.com, Alibaba, and others multiple times last year over their competitive practices. In April, it imposed 3.6 billion yuan in penalties on firms for meal-delivery safety violations.

Food industry analyst Zhu Danpeng said the competition among platforms has ended after tough government intervention. "The battle benefited consumers, but the damage to small restaurant operators is still there," Zhu said.

The subsidy frenzy hurt financial results. For April-June, merchant Luckin Coffee reported that same-store sales at self-operated stores fell 5.3 per cent. It cited a high comparison base created by raise meal-delivery platform subsidies. At the platforms themselves last year, Meituan swung to a loss, Alibaba recorded a decline in profitability, and JD.com's profit almost evaporated.

"It was totally ridiculous," Sander said. "It was definitely not sustainable."

The subsidy blitz reshaped the competitive landscape. In April, Goldman Sachs said Meituan's meal-delivery market share had dropped from the 75 per cent to 80 per cent range it held before the price war. The meal-delivery market has since fallen under the umbrella of instant retail.

Analysys data for the second quarter shows the following instant retail market shares:

Analysts warn this dynamic may change again if platforms fail to retain users once they reduce subsidies.

The new focus on infrastructure

Second-quarter earnings indicate a strategic pivot. Platforms are now focused on turning user growth gained via meal-delivery discounts into profitability through broader instant retail.

Alibaba's instant-retail revenue jumped 45 per cent year on year to 53.3 billion yuan. JD.com said its loss in the segment narrowed significantly, helped by loss reduction in meal delivery. Meituan, with the largest merchant and rider network, swung to an overall profit for the first time in almost a year as subsidy spending eased.

"The industry has moved from the first stage of winning users through subsidies to a second stage of retaining users, expanding supply and calculating order-level economics," said Liu Xingliang, director of the Beijing-based Data Centre of China Internet.

The companies are now fighting through logistics infrastructure rather than subsidies. Meituan is building supermarkets to expand its grocery business. Alibaba and JD.com are opening dark stores and super-fast "lightning warehouses" in densely populated neighbourhoods to fulfil orders within an hour.

"Now they are really building something instead of just giving away a lot of marketing budget," Sander said.