Internet & Tech

On a diet

Baidu sheds food delivery unit

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On their bike: Waimai’s staff

In February this year a brawl broke out between two gangs: one clad in blue, the other in yellow. But the combatants weren’t traditional thugs. They were employees of rival food delivery companies Ele.me and Meituan, fighting over territory in Zhangpu, a county in Fujian province.

According to BigData-Research, Ele.me controls 37% of the food delivery market, while its sparring partner Meituan-Dianping has grabbed 33%.

Conspicuously absent from the turf war in Zhangpu were the red jackets of Baidu Waimai, the third largest food delivery firm, which holds 17% share in the market.

Seemingly unwilling to fight for a larger commercial cut, Baidu has just announced that it will sell its delivery business to the Alibaba-backed market leader, Ele.me.

As recently as May this year there was speculation that Baidu Waimai would adopt a different tactic. Then, the company was rumoured to be in talks with courier SF Express for a joint venture in food delivery, with SF Express willing to invest $200 million in the partnership. However Baidu abandoned these talks and began negotiating its merger with Ele.me.

Under the agreement, Ele.me will buy out Baidu for $500 million – better terms than the SF Express offer but still a steep discount on Waimai’s $2.5 billion valuation last year.

Waimai will maintain operations as a separate entity from its acquirer for the foreseeable future. In an interesting turn of phrase, Zhang Xuhao, CEO of Ele.me, said that Waimai will continue to “focus on the high-end market and explore quality service: a totally different strategy from that of Ele.me”. But Caixin Weekly reports that Alibaba is keen to merge its food delivery network (consisting of Ele.me, Koubei and now Waimai) into a single business to challenge Tencent-backed Meituan-Dianping more aggressively .

Indeed, the magazine says that competition is set to intensify as there is still much ground to be won. Consultancy group iResearch valued China’s O2O to-the-door market at Rmb263 billion ($39.97 billion) this year, but measured penetration at only 10%. It argued that although this means the growth potential is huge, the investment required to seize market share is equally grand.

Baidu was unlikely to win the war for food delivery but it will retain a tactical role in the fight. Ele.me is spending a further $300 million for fuller access to data from some of Baidu’s other services, such as Baidu Maps, Baidu Search, and Baidu Nuomi, a group-purchasing platform. When Baidu sold its travel service Qunar to Ctrip in 2015 (see WiC302) CEO Robin Li also highlighted how the partnership would allow the company to focus more on distributing its search, mapping and payment services more widely, through the Ctrip network.

Tim Culpan, a columnist at Bloomberg Gadfly, notes that as Baidu pulls back its O2O products and shifts to backend services, it becomes more dependent on selling services like these to other companies. Ultimately it will be businesses, not consumers, that purchase the Big Data and AI technologies that Baidu is trying to develop as alternative revenue streams to its lower margin search engine function.

Of course Baidu might end up supporting a losing side, as it did with Uber China.

But even then the company was able to swap its equity in the American brand for shares in Uber China’s buyer Didi Chuxing. Culpan argues that this helped Baidu to beat earnings estimates for its fourth quarter last year, riding a surge in Didi’s value.

Baidu, long seen as the weakest of the BAT trio (in fact, some argue that JD.com should take its place, transforming the label into JAT), shouldn’t rely on investment gains like this for its income, Culpan warns. “Baidu may get away with losing on O2O,” he says. “But it can’t afford to fail at B2B”.


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