INTERNET: O2O Food Wars Overheat at Meituan, Ele.me

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Bottom line: Contention around Meituan’s new mega-funding and Ele.me’s urgent desire to sell itself reflect overheated competition in the O2O restaurant services market, which could result in a major shake-up over the next 12 months.

Meituan denies rumors of funding collapse

Just a couple of days after reports emerged about the latest fund-raising by leading group buying site Meituan, the newest reports are painting a more chaotic scene in the sector for online-to-offline (O2O) services involving collaboration between web sites and restaurants. Meituan is once again in the news, though this time it’s denying rumors that its latest fund-raising has collapsed. Meantime, take-out dining delivery specialist Ele.me is also reportedly in frantic need of cash due to stiff competition gobbling up the industry.

This pair of stories reflects a cycle that’s all too common for emerging industries in China. That cycle typically sees one or two companies find success in a new business area, sparking a gold-rush that sees many others rush into the space. The result is always a surge in overcapacity, which is almost always followed by a shake-out that sees most companies close or withdraw from the business.

Meituan is certainly no stranger to such cycles, since it was one of the few survivors of a similar boom-bust in the group buying space 3 years ago. That cycle saw hundreds of companies jump into an area pioneered by US leader Groupon (Nasdaq: GRPN) around 2010 and 2011 , only to mostly close or be acquired a few years later. Meituan and rival Tencent-backed (HKEx: 700) Dianping emerged as the 2 biggest survivors of that cycle.

Now a newer cycle has emerged in the O2O business involving tie-ups between Internet companies and restaurants, which has become one of the most lucrative spaces for group buying sites like Meituan and Dianping. Meituan was looking like a big success story after surviving the earlier group buying wars, and investors seemed to validate that success by giving it $700 million in new funding late last year. (previous post)

But much has happened since that time, as online search leader Baidu (Nasdaq: BIDU) poured major new money into its rival services, Tencent strengthened its ties with Dianping, and e-commerce leader Alibaba (NYSE: BABA) revived its rival Koubei service. The growing competition forced Meituan to return to market for more funds, and earlier this week I wrote the company was close to a new round for up to $2 billion.

Rumors of Collapse

But rumors quickly spread saying the funding had collapsed, prompting Metituan’s angry CEO Wang Xing to issue a statement of denial and saying he planned to sue the person who started the talk. (Chinese article) In my view, Wang doesn’t have much credibility these days because he previously denied rumors that his company was pursuing new funding even though it clearly was.

But that said, the bottom line here is that talks have probably become contentious and investors may be spreading rumors to try and pressure a cash-needy Meituan to accept their terms. I expect the main source of the contention is valuation, and that investors may feel Meituan isn’t worth the $5 billion valuation it got with its last funding late last year.

Next there are the other reports that say Ele.me, the take-out dining delivery service whose backers include Dianping, is also in desperate need of cash and wants to sell itself to a wealthy backer. (Chinese article) The reports note that Ele.me’s situation is quite dire, and that it doesn’t have time to wait for the alternate route of raising cash through an IPO.

Ele.me already counts Dianping among its early investors, so perhaps Dianping would be the logical company to make an acquisition. Dianping itself raised $800 million earlier this year, and also has more cash resources than Meituan through its own equity tie-up with the welathy Tencent. But no matter who ends up buying Ele.me, the bigger picture is that China’s O2O restaurant services sector is overheating and getting ready for a major shake-up.

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