An employee at a Dicos outlet, a Western-style fast-food chain, in Zhengzhou, Henan province. The food chain has teamed up with Meituan, a group-buying service promoted by e-commerce giant Alibaba Group Holding Ltd. Uber ups its ante in China. (Photo/China Daily)
Consolidation moves in online-to-offline sector will end price war between firms
Two of China's biggest online-to-offline, or O2O, service providers, backed separately by rivals Alibaba Group Holding Ltd and Tencent Holdings Ltd, decided to join hands on Thursday to create a formidable giant and end bitte price wars.
Meituan.com, a group-buying site backed by Alibaba, and consumer review service Dianping.com, which is funded by Tencent, said in a joint statement that they have decided to go in for a strategic merger.
The new company, valued at $15 billion, will be run on a co-CEO and co-chairmen basis. Meituan and Dianping will retain the original structure of their respective human resources, and run their businesses separately while retaining their independent brands.
Zhang Tao, CEO of Dianping, said: "Cooperation is the big trend. We will leverage our resources to help 10 million merchants better serve 1 billion consumers."
The online-to-offline service market in China is expected to become a 7.2 trillion yuan ($1.13 trillion) industry by 2017 from the current 6 trillion yuan, according to a report from Beijing-based Internet research firm iResearch Consulting Group.
It is not immediately clear what the equity ratio of the new company will be. But the deal is expected to create a strong competitor to Baidu Inc, which promised to invest $3.2 billion over three years in its own O2O service platform Nuomi.
Gene Cao, a senior analyst at market research firm Forrester Research Inc, said the move comes as the country's crowded O2O sector finds it increasingly hard to attract venture capital.
"Meituan and Dianping are under heavy financial pressure given the amount of cash they have invested to lure consumers. But with the country's economy slowing, investors become reluctant to pump money into the sector.
"The tie-up matches the expectation of investors and would help in better channeling of resources from fighting against each other. It also allows the firms to explore new businesses," Cao said.
Liu Xuwei, an analyst at Beijing-based Internet consultancy Analysys International, said it remains to be seen how the former competitors can thrive after the merger.
"Meituan and Dianping accounted for more than 80 percent of China's group-buying market. Their businesses are highly overlapping and competing interests exist among their own partners."
For instance, selling movie tickets online is part of Meituan's key business, but Dianping is currently working closely with other ticketing service websites such as mtime.com.
"In the short term, the merger will help the two companies save costs, like reducing discounts to consumers. But it will be a long-term challenge for the two companies to prosper along with each other," Liu said.
What further complicates the deal is that Alibaba, an investor in Meituan, is marching into the market with its own brand of on-demand local services.
The e-commerce giant invested 6 billion yuan to set up Koubei.com in June.
"It is also unclear how Alibaba's Koubei will interact with the newly merged company in the future," Liu said.
Key numbers
・ $15 billion
The combined value of the company formed by the Alibaba Group Holding Ltd-backed Meituan and Dianping, an affiliate of Tencent Holdings Ltd, according to people familiar with the matter. That would make it the largest merger in China's Internet industry based on combined valuations.
・ 7.2 trillion yuan (about $1.13 trillion)
The size of China's location-based services market by 2017, according to Internet researcher iResearch Consulting Group. Location-based services include restaurant bookings, food deliveries and movie-ticket purchases.
・ 82 percent
The combined market share that the new entity would have in China's group-buying market. Meituan accounted for 52 percent of the group-buying market during the first six months of the year, followed by 30 percent for Dianping and about 14 percent for Baidu Inc's Nuomi, according to researcher Analysys International.
・ 1 trillion yuan
The transaction volume that Meituan expects to achieve by 2020, according to its founder Wang Xing. Meituan had more than 20 million active daily mobile users and operates in about 1,000 cities.
・ 90 million
Number of user-generated reviews on Dianping's sites, which are similar to Yelp Inc. Dianping operates in more than 2,500 cities and 200 countries, including the United States, according to its website.
