We also support Hindi language, do you want change to it?
हम यह भी हिन्दी भाषा का समर्थन है, आप इसे करने के लिए परिवर्तन करना चाहते हैं?Yes(ह)
In Ep. 25 of TechBuzz China, co-hosts Ying-Ying Lu and Rui Ma talk about Alibaba
This episode of TechBuzz is the first in a series of deep dives on the local services space in China. Rui and Ying-Ying begin with some background on Meituan
Rui and Ying-Ying tell the origin story of ele.me. The startup’s founder, former CEO, and now-Chairman Zhang Xuhao was a first year graduate student at Shanghai Jiatong University when he started the company with five friends in 2008, back when entrepreneurship was considered rebellious and unconventional. The venture was self-funded for a few years before landing angel investment from GSR’s Allen Zhu, one of the best investors in China. Though ele.me grew quickly, it was still fairly small when it got its first big break– Dianping’s investment of $80 million which allowed the startup to embark on an accelerated expansion plan. It went from 300 employees at the end of 2013 to 5000 at the end of 2014. By August 2015, with traffic from shareholder Dianping and additional investment from Tencent
The story, however, doesn’t end there. Listen to the newest episode of TechBuzz China and join our co-hosts in exploring the rise of ele.me, its sale to Alibaba
As always, you can find these stories and more at pandaily.com. Let us know what you think of the show by leaving us an iTunes review, liking our Facebook page, and tweeting at us at @techbuzzchina to win some swag! Finally, a huge shoutout to our new listeners over at dealstreetasia.com.
We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network.
We are a new weekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. TechBuzz China is a part of Pandaily.com, a new English language site that tells you “everything about China’s innovation.”
(Y: Ying-Ying Lu; R: Rui Ma)
[00:00] R: Ooomph. There’s some major hurt going on in the public markets right now, and Chinese companies, already pummeled, are mostly sliding even further.
Y: One of the only bright spots had been Meituan, which we covered in depth before and which had debuted on the Hong Kong Stock Exchange at a valuation of about $50Bn, but even that is now lost because not yet a month later, it has lost about 25% of its market cap.
[00:33] R: As far as we can tell, this is probably mostly attributable to the market-wide decline. But as Alibaba
Y: Maybe not quite an existential battle, but this war of O2O, or online to offline, is shaping up to be intense, and the opening shots have been fired, loud and clear.
R: Well many of those shops have actually been fired, but the latest round is the finalization of the merger between food delivery rival Ele.me, that’s spelled E-l-e-.-m-e and Alibaba
[1:26] Y: If you’ll remember, Alibaba
R: And this new Ele.me-Koubei entity, which is still unnamed, has already received an additional $3 billion in investment, from Alibaba
[1:58] Y: I don’t think the money flowing in will stop there, because the official wording that accompanied Alibaba
[2:27] Y: Well, Alibaba
R: Yeah, Wang Xing, who has been through and triumphed in the Thousand Groupon War, and is a hardened warrior if there ever was one, should he be losing sleep? Or does Team Meituan
[2:56] Y: This is another one of our fun multi-part series deep dives, so I hope you sit back and listen, as we go into the first part of what’s shaping up to be a massive war in the local services space and two of its leading players, Meituan
R: But today, we start with Ele.me., which is kind of spearheading Alibaba
Y: It took a pretty circuitous route to get here though. But no worries, because we will explain how it all happened.
[5:08] Y: Alright guys, this is a messy battlefield, so we are going to take some time to give you your bearings. If you aren’t familiar with Meituan
R: Indeed, as we mentioned, Meituan
[5:52] Y: Yeah, for a while, it seemed that Meituan
R: That’s honestly mindblowing. I thought I’d never see the day Ctrip could be toppled in any travel-related metric, especially after it acquired so many rivals. But there you have it. Meituan
Y: No, the sectors it’s in are just too lucrative, too ripe for disruption, to not attract the attention of other entrepreneurs. In China, no good business opportunity goes unchallenged, as Meituan
[7:09] R: Since Tencent
Y: Yeah, not only was it strategically obvious, but after Tencent
[7:54] R: Well, it ended up going the acquisition route. Almost immediately after Dianping and Meituan
Y: And we know what happened after that. It increased its stake by putting in another one billion dollars into Ele.me in 2017 before finally acquiring the entire business outright earlier this year for an implied valuation of $9.5 billion.
[8:26] R: But what is Ele.me? Well, first of all, it means, “Hungry Now?” But also it is looking like it’s probably the most successful dorm room startup in the history of Chinese internet.
Y: Bike sharing pioneer Ofo could have had a chance, but that now looks unlikely. Ele.me is the clear winner here. Former CEO now Chairman Zhang Xuhao 张旭豪 was a first year graduate student at Shanghai Jiaotong University, a top ranked school in China, when he started the company with 5 other friends back in 2008 and launched the site in April 2009.
[9:03] R: Apparently, from the very beginning, Zhang Xuhao was convinced he had the idea for a $15Bn business. I don’t know what math he did there, but the point is, he was a big dreamer from the get go. Anyway, one version of the founding story says that the idea for Ele.me started because the founders were playing a ton of video games and they didn’t want to leave their computers to feed themselves. So they thought, what if we could order food from our computers?
Y: Kinda like the Uber origin story. Pretty memorable. We built this from scratch to scratch our own itch sorta thing.
[9:39] R: Yeah, but the other version, which makes for a less great story but I think may be more accurate, simply talks about the fact that Zhang and main co-founder Kang Jia were just really disillusioned by school and just wanted to do something exciting with their lives. And back in 2008, entrepreneurship was both rebellious and unconventional, not like the well-traveled path it has become today.
Y: Maybe because they were basically student entrepreneurs though, the first few years were pretty tough. They started off by actually doing delivery for a restaurant to “get to know the business.” Basically, Zhang Xuhao and his buddies could often be seen riding his bike around campus delivering food.
[10:25] R: The venture was self-funded and they struggled for a few years before finally landing angel investment of a few million dollars from GSR in early 2011. I think that really set them up for later success, because the partner that led the deal was Allen Zhu, literally one of the best investors in China, especially in this on-demand marketplace segment. Two other quintessential Allen investments? Didi and Ofo. See what I mean? The guy is a megastar investor.
Y: By 2014, Sequoia China and Matrix China had joined in and become investors, but it wasn’t all good news. Despite starting way earlier than Meituan
[11:18] R: Well, now in media it’s popular to term this phenomenon “consumption trickle down,” 消费下沉, i.e. serving those outside of China’s richest and mostly coastal middle class. But back then, all the Ele.me founders knew was that they were seeing a booming delivery business in smaller cities they had never considered as markets.
Y: If you’ve been following Techbuzz, I think you’ll find this realization pretty unsurprising. The Ele.me founders were students at one of China’s most elite universities and they probably lived in somewhat of a bubble, and mostly saw the “consumption upgrade” or 消费升级, which was indeed also taking place in China at this time. And I mean who’s to say they were wrong? If you are ordering takeout, that does imply a certain level of earnings power. So their logic was pretty sound. Their competitor Wang Xing, on the other hand, had plenty of experience with second, third, and even lower tiered cities in China from the Thousand Groupon War, so he knew that the demand existed everywhere, not just in China’s megacities.
[12:31] R: Basically, Ele.me was doing well but was still fairly small by the time that it got its big break. Five years in, it had only raised something like $25 million. But in the summer of 2014, Dianping put in $80 million, a ginormous amount of money for the time, and this, together with a strategic tieup, enabled Ele.me to embark on an accelerated expansion plan.
Y: Dianping had really suffered in its fight with Meituan
[13:33] R: Armed with this cash, ele.me expanded quickly to 200 cities. Maybe because they felt FOMO in a big way, but they got pretty crazy aggro. For example, they had their new hires go through boxing training to increase aggression. No joke. Around this time too, there were lots of news and viral videos of Ele.me and Meituan
Y: Yeah it was totally crazy. But what do you expect, Ele.me went from 300 employees at the end of 2013 to more than 5000 at the end of 2014. But all in all, it was doing pretty well. The tieup with Dianping, which was still the leading “Yelp” of China, gave it a lot of much needed traffic volume. And Dianping, which was invested in by Tencent
[14:38] R: It was doing well! In 2014, its market share was ahead of Meituan
Y: Indeed, some friends who worked for these companies at the time corroborate this version of events. But, then the unthinkable happened. When Zhang Xuhao was having an offsite in Bali in October during Golden Week, Tencent
[15:33] R: Facilitated by none other than Bao Fan, star of our last episode. But yeah, it was probably the quickest mega-deal ever completed, and it left Ele.me confused as heck. In the space of two weeks, Ele.me’s biggest competitor Meituan
Y: Seriously. That must have been so confusing. And for a little bit, it was not super clear who was going to have control of the combined entity. Was it Meituan
R: Naturally, at this point, Tencent
[16:51] Y: Ele.me asked instead that the food delivery business be spun out of Meituan
R: Ele.me, who had been high-flying in 2015, all of sudden found that its biggest source of traffic, Dianping, was gone. And having won the Groupon war, Meituan
Y: Meanwhile, Alibaba
[18:22] R: Yingying, you still have a few more years to beat him. What do you think, can we get Techbuzz to unicorn status by … say, 2020?
Y: First unicorn podcast? … no problem, Rui! But seriously, back to ele.me, after selling to Alibaba
R: That’s to be expected, since Zhang Xuhao is quite young and hot-headed by Alibaba
[19:23] Y: Zhang Xuhao might have been the right founder to get Ele.me to where it is today. It made about $400 million of revenues in Q2 of this year, or about 3% of Alibaba
R: I don’t know about that, Ele.me had about 15,000 employees before the acquisition, so is that not 10 to 100? I mean, it also had 260 million users in 2000 cities in China covering 1.3 million restaurants!
Y: That’s true. It also grew its 蜂鸟配送 which is its own self-developed courier business to 3 million registered couriers averaging 4.5mm deliveries a day. By the way, Rui, it’s too bad we both moved out of China before that became super cheap and convenient. I know Pandaily uses this one and similar services all the time. Anyway, agreed that Ele.me is a massive company by most measures.
[20:51] R: It’s giant, just not Meituan
Y: Well don’t forget that Ele.me did also buy Baidu
R: Yeah. But if Ele.me was at say, 100 when it got acquired by Alibaba
[21:53] Y: Let’s make sure our listeners understand that it’s not that Ele.me has not kept up. Ele.me, especially after being folded under the Alibaba
R: That may just be the tip of the iceberg. It was only on August 1 that Alibaba
[23:07] Y: We will definitely be devoting a lot of time to 新零售 in our next episode. But just to give you some heads up, while exact definitions differ, it is probably what your intuition tells you it is. According to Jack Ma, it is “a seamless merger of offline, online and logistics for a dynamic new world of retailing.”
R: For both Tencent
[24:05] Y: It’s probably too early to say who’s going to win the New Retail war, Alibaba
R: In that press release, which is dated August, Ele.me and Koubei, which now you know have merged, are both listed under Local Services. But, you might find it interesting to note that as of the beginning of this year, Koubei was still most definitely considered part of Alibaba
[24:57] Y: What is Koubei? What is New Retail? Why is New Retail bleeding into local services? How do these reinforce each other, or do they? Are they labels, which are just kind of meaningless? And why is there always a war in Chinese internet? Who’s going to win this war?
R: So many great questions that I’m sure many of you Techbuzzers are out there asking. But you’ll have to wait untill next week for our deep dive into Koubei, the other half of Alibaba
R: We’d like to give a shoutout to our partners at SupChina. In addition to our podcast here with Pandaily, they publish the excellent Sinica podcast, a weekly discussion of current affairs on China with journalists, writers, academics, policy makers, and business people.
Y: And Sinica has been adding steadily to its growing podcast network! There’s NuVoices, which features women, as well as the new ChinaEconTalk, and of course the wonderful Caixin-Sinica Business Brief. Check these out wherever you get your podcast!
Y: OK, that’s all for this week folks! Thanks for listening. We really enjoyed putting this together, and are always open to any comments or suggestions. You can find us on twitter at thepandaily, techbuzzchina, and my personal Twitter account is GINYGINY.
R: And my twitter is spelled RUIMA. We’ll be back here same time next week!
TechBuzz China by Pandaily is powered by the Sinica Podcast Network. Pandaily.com is an English language site that tells you “everything about China’s innovation.” Our producers are Shaw Wan and Kaiser Kuo. Our intern is Wang Menglu.