(Yicai) Dec. 1 -- Meituan, China’s largest on-demand services provider, swung to a loss in the third quarter of the year, mainly as a result of massive consumer subsidies to fend off competition from Alibaba Group Holding and JD.Com.

The net loss exceeded CNY18.6 billion (USD2.6 billion) in the three months ended Sept. 30, versus a CNY12.9 billion net profit a year earlier, according to the earnings report the Beijing-based firm released on Nov. 28. Revenue rose 2 percent to CNY95.5 billion (USD13.5 billion).

Its core local commerce segment, which includes food delivery, had an operating loss of CNY14.1 billion and an operating margin of minus 20.9 percent. Revenue fell 2.8 percent to CNY67.4 billion.

Meituan pledged earlier this year to invest CNY100 billion (USD13.7 billion) over three years in the form of consumer subsidies to support its food service industry partners after JD.Com entered the meal delivery business in February with the launch of JD Takeout and Alibaba rolled out its new instant retail service Taobao Flash Buy in April. They too have committed to spending billions of dollars on consumer subsidies.

Alibaba’s net profit for the same quarter halved from a year earlier, while JD.Com’s more than halved.

“Delivery services revenue declined modestly year over year, as a result of the significantly increased incentives deducted from delivery services revenue in response to the intensified competition to convert new users and enhance user stickiness,” Meituan said.

Chief Executive Wang Xing reiterated on the firm’s earnings conference call that the price war in China’s food delivery market is an example of low-quality, low-price involution-style competition, which the company firmly opposes.

“The last six months have proved one thing: [the price war] doesn't create any real value for the industry, and cannot be sustainable,” Wang noted.

While cautioning that Meituan expects an operating loss this quarter as well, Wang said the firm should return to solid earnings over the medium to long term once market conditions stabilize.

Meituan’s shares [HKG: 3690] closed 2.9 percent lower at HKD99.55 (USD12.78) each in Hong Kong today. The benchmark Hang Seng Index gained 0.7 percent. The company’s stock has lost 34 percent of its value since the end of last year.

Market Share

Heavy subsidizing appears to have helped Meituan defend its lead in the food delivery sector. For orders with a net average order value above CNY15 (USD2.10), the company’s gross transaction value market share exceeds two-thirds, and for orders above CNY30, its share is over 70 percent, according to Wang.

Both daily active users and monthly transacting users for its food delivery service reached record highs in the third quarter.

Revenue from the new initiatives segment, which includes Meituan’s grocery retail business, rose 16 percent from a year earlier to CNY28 billion in the quarter, though the operating loss widened to CNY1.3 billion, reflecting higher investment in overseas expansion.

Meituan’s Hong Kong delivery service, Keeta, turned profitable in October. “It took us 29 months to get to that milestone, ahead of our original three-year plan,” Wang said, adding that after launching in Qatar in August, Keeta expanded into Kuwait and the United Arab Emirates in September, and began pilot operations in Brazil in late October.

Selling and marketing expenses surged 91 percent to CNY34.3 billion, driven by higher spending on promotions, advertising, and user incentives.

Research and development expenses jumped 31 percent to CNY6.9 billion, accounting for 7.3 percent of total revenue, mainly due to greater company-level investment in artificial intelligence. In the quarter, Meituan released its LongCat-Flash open-source model series and launched the Xiaomei intelligent assistant.

Fourth-Quarter Loss

"Market competition has remained overheated recently," Meituan said. “Accordingly, we expect the operating loss trend to persist in the fourth quarter for both the core local commerce segment and the company as a whole.”

Even so, there are signs the sector may be cooling. Alibaba and JD.Com have hinted at a pullback from aggressive subsidizing. JD noted in its third-quarter earnings report that the Beijing-based firm’s overall investment pace has been slowing.

"We are confident in maintaining our leading position by continuing to strengthen our core competitiveness," Wang pointed out. 

"We will continue to refine our products and services to better meet consumers' very diverse local services needs while empowering merchants through technology innovation and AI application, altogether to drive the sustainable and healthy development of the whole industry,” he said.

Editor: Futura Costaglione