Meituan

HKEX:3690

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Meituan Dianping Second Quarter 2020 Earnings Conference Call. [Operator Instructions] And please be advised that this call is being recorded today.

I would now like to hand the conference over to your first speaker for today, Ms. Scarlett Xu. Thank you. Please go ahead, ma'am.

[Scarlett Xu, executive]

Thank you, operator. Good evening, and good morning, everyone. Welcome to our second quarter 2020 earnings conference call. Joining us today are Mr. Xing Wang, Chairman and CEO; and Mr. Shaohui Chen, Senior Vice President and CFO of Meituan Dianping. For today's call, management will first provide a review of our second quarter 2020 results and then conduct a Q&A session.

Before we start, we would like to remind you that our presentation contains forward-looking statements, which include a number of risks and uncertainties and may differ from actual numbers in the future. This presentation is based on our management accounts, which have not been audited or reviewed by our auditor. This presentation also contains unaudited non-IFRS financial measures that should be considered in addition to and not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to the disclosure documents in the IR section of our website.

Now I will turn the call over to Mr. Xing Wang. Please go ahead, Xing.

[Xing Wang, executive]

Thank you, Scarlett. Hello, everyone, and welcome to Meituan Dianping's Second Quarter 2020 Earnings Call. Although we continue to see impacts from the outbreak of COVID-19 in the second quarter, our business demonstrated resilience and recovered at a good pace, with total revenue increasing by 8.9% year-over-year and 47.6% quarter-over-quarter to RMB 24.7 billion in the second quarter of 2020.

Adjusted EBITDA increased by 12% year-over-year to RMB 2.6 billion, and adjusted profit improved to RMB 2.7 billion, increasing by 82% year-over-year. Our operating cash flow also turned to positive RMB 5.6 billion from the previous quarter. And annual transacting users on our platform increased to 457.3 million, up by 8.2% year-over-year. While annual active merchants increased to 6.3 million, up by 6.7% year-over-year.

As the leading e-commerce platform for local services, social responsibility is at the heart of what we do. During the quarter, we helped our merchants weather the storm, which created value for our vast community of consumers or merchants. And as a result, we stimulated the progressive recovery of the local service industry from the pandemic. At the same time, we further boosted the competitive advantage of our core businesses while enhancing our ecosystem during our business recovery process.

In the second quarter, we utilized advanced digital operation tools to enable more merchants, enhance our on-demand delivery infrastructure to facilitate the digital lifestyles of consumers and accelerate the online penetration and digitization of essential local services on both the demand side and the supply side.

I will now provide an overview of our performance in each business segment for the second quarter of 2020. Our CFO, Shaohui, will then talk about our second quarter financial performance in more details.

Let's first start with our food delivery business. During the second quarter, gross transaction value of our food delivery business increased by 16.9% year-over-year to RMB 108.8 billion, while the daily average number of food delivery transactions increased by 6.9% year-over-year to 24.5 million. Despite the continuous impact of COVID-19, all transaction numbers returned to positive year-over-year growth in the second quarter, which yet again validated the critical need of our both consumers and merchants for food delivery services as well as the unique competitive advantage of our business model.

In June, the new COVID-19 cases in Beijing led to a sharp drop in the number of transactions in Beijing, Nanjing and other province. Nevertheless, our immediate response to the situation showcased our increasing experience in managing the recurrence of COVID-19.

To ensure the safety of our delivery riders and customers, for example, we immediately organized nucleic acid testing for all of our delivery riders in Beijing, expanded the use of intelligent lockers in the city and further upgraded our contactless delivery process. For merchants, we also rolled out targeted support and commission rebate programs. For our high-quality merchants in Beijing that was severely impacted by the new COVID-19 cases, we offered commission rebates between 3% to 6% that could be used for online promotion and marketing on our platform. We also created a portal for merchants to upload their green COVID-19 testing results so as to provide consumers with extra food safety assurance.

Due to our immediate actions and protocol measures, the daily average number of food delivery transactions recovered and stabilized by early July and has continued to maintain good growth momentum throughout the summer.

The COVID-19 pandemic has brought to us both new opportunities as well as new responsibilities as we plan for the future of the major ecosystem. We will soon roll out a blueprint and develop a program for more than 1 million merchants. In the next 3 years, we aim to assist this selected group of high-quality merchants in a holistic digital transformation of their business operations and to provide them with more incentive on the Meituan platform. We will equip these merchants with the ability to tackle the new challenges of online operations and ultimately help them achieve sustainable growth and innovative breakthrough over the long term.

In the second quarter, we continued to roll out various promotional events to stimulate the recovery of our food delivery business. Most notably, we launched the June 18 Food Delivery Festival. Around 4,000 reputable restaurants and brands participated in the event to provide consumers with a wide variety of attractive promotions in the period.

We were also spot-on in identifying consumer behavioral change and used targeted promotions to actively increase the consumption of afternoon tea and late-night snacks. During the quarter, for example, sales from drinks category grew by more than 50% year-over-year, while daily average orders for milk teas also achieved record highs of 2.4 million during the second quarter.

We continue to ramp up the portion of subsidies allocated to targeted repeat consumers through our effective membership program. As a result, our number of monthly membership subscribers achieved a record high in the quarter, and we considerably improved the stickiness and transaction's frequency of our membership subscribers.

We believe that our highly efficient on-demand delivery network is essential to our businesses, especially in the context of the current environment. In addition, the functionality of our highly efficient on-demand delivery network also reflects the state of the technology advancement of our strategy and of our lifestyle and well-being.

I am delighted to say that our delivery capabilities and efficiencies continued to improve in the second quarter, and the importance of an on-demand delivery network as a critical component of society's broader logistics infrastructure was substantially elevated. Our delivery network helped to ensure continuity in people's daily lives during the pandemic and served as a stabilizing force for society by creating abundant employment opportunities.

By maintaining our commitment and continuing to invest over the years, Meituan has built up a top-notch delivery network and covers over 2,800 cities and manage more than 1 million daily active delivery riders as of early August. In the first half of 2020, Meituan employed close to 3 million delivery riders in aggregate. In fact, the government also coined the term couriers for online orders as the term for the new profession that Meituan delivery riders represent. The government also included this term in the latest [ PRZ ] occupational classification system this year. Meituan delivery riders are an excellent representation of our fast-evolving society, which continued to be advanced by the integration of Internet and services.

Meanwhile, we are also actively exploring autonomous deliveries and other key areas of future mobility. As many of you know, long-term thinking is part of our business philosophy. As such, we will continue to invest wisely in our on-demand delivery network to further improve its operating efficiency and enlarge its capacity while striving to serve the needs of our merchants and consumers in more service categories. We are confident that our delivery network and logistical infrastructure will become the bedrock of our society and help to facilitate the change in lifestyle during the new [indiscernible].

Next, turning to our in-store, hotel & travel segment. In the second quarter, revenues declined by 13.4% year-over-year yet increased by 46.8% quarter-over-quarter on the impact of COVID-19. Although this segment was more impacted by the outbreak of COVID-19, the recovery of transaction volumes and advertising revenue in the quarter was on the right track. As a leading platform for in-store dining and other local services, we cooperated with local governments to launch the Safe Consumption Festival, that is [indiscernible], in more than 60 cities and issued e-Vouchers to consumers during the quarter, helping to stimulate local service consumption and restore local economies in turn.

These e-Vouchers were mainly for in-store dining initially, and we have since expanded them to cover hotels, shopping and other local services. And for example, we proactively worked with the Wuhan government from April to July to distribute e-Vouchers to Wuhan citizens to support the recovery of restaurants, catering and travel industries. We also worked with Shanghai government and provided substantial promotion during the 5th of May festival, that is [indiscernible], to collaborate with over 10,000 merchants across in-store dining, travel, hotels, culture as well as entertainment and shopping centers. These promotions were all highly effective as the sales of participating merchants all enjoyed substantial growth on a sequential basis during the promotion period.

The list of cities who have currently collaborated with us on this initiative is growing, and investments into these initiatives are also increasing.

We also launched a series of promotional campaigns in the second quarter. These promotional campaigns included Labor Day promotions, Dragon Boat Festival promotions and the June 18 Marketing Festivals through which we provided high-quality, one-stop service solutions for consumers at highly attractive pricing. These events covered all aspects of our in-store services and helped to accelerate our collaborations with the popular merchants to further improve our merchant base and offer consumers a wider variety of choices in turn.

In particular, online transaction volumes for medical, aesthetic and beauty products during the June 18 Marketing Festival grew by more than 130% year-over-year. During the festival, around 200,000 medical aesthetic products were offered on our platform and approximately 0.5 million consumers participated. We adopted innovative channels such as live streaming, video conference appointments and other new online mediums to better facilitate the consumption. We also introduced the novel medical aesthetic doctors service to provide consumers with trusted medical advice in real time. We believe the trend of online penetration and digital transformation on medical aesthetic and other local services will continue. We also plan to roll out these new forms of online consumer interaction to other service categories.

The hotel business has yet to fully recover to its prepandemic levels. Quarterly, domestic room nights in the second quarter was 78 million, down by 17% year-over-year. Nevertheless, we did not stop increasing our partnership with more hotels by our Safe-Stay Program, that's [indiscernible], to provide travelers with accommodation options more conducive to their desires and their quarantine environment.

In light of the increasing demand for intra-city and short-distance local travel, we launched the Safe Travel program, as the [indiscernible], to help expedite the recovery of the industry.

Our competitive advantages in local and short-distance travels continue to expand during the promotional period. Notably, the pace of development of our high-star hotel partnership also picked up, and we significantly increased our relationship with these type of hotels in the second quarter by increasing their nonlodging revenues through our Hotel+X program. As a result, the contribution [ advantage ] of high-star hotel room nights to total domestic room nights consumed on our platform was more than 15% in second quarter, representing an increase of 3 percentage points year-over-year.

Now moving to our new initiatives. Recovery across different businesses continued to make good progress in the second quarter. As a result, revenue from our new initiatives segment increased during the period, growing by 22.1% year-over-year and 35.2% quarter-over-quarter. COVID-19 was the catalyst for several of our new initiatives, and we saw a noticeable shift in consumers' online shopping behavior during the pandemic. In addition, the online penetration of traditional off-line service businesses also accelerated, and we ramped up the expansion of our businesses that will be beneficiary of the structural change such as grocery retail.

Our marketplace model has made Meituan Instashopping achieved a stellar year-over-year revenue growth during the second quarter as we expand our product variety and SKU categories to grow its merchant base materially. Our self-operated model, Meituan Grocery, [indiscernible], not only materially expanded its coverage in key cities, such as Beijing and Shenzhen but also began operation in such new cities as Guangzhou in July. In addition, by further optimizing our SKU selection and streamlining our operations, our daily average number of orders per store and total daily average numbers of orders grew on a sequential basis.

During the quarter, we also established a new business division for community group purchase service called Meituan Selected, [indiscernible], and rolled out this service brand accordingly in the city of Jinan in Shandong province in July. Meituan Selected specifically targets lower-tier cities via its preorder and self-pickup model. Meituan Selected offers carefully selected fresh produce and daily necessities at attractive price for local consumers within different communities. We appoint group leaders in each community to promote our discounted grocery products by WeChat groups. Group members can place orders through our WeChat Mini Program and pick up their products at self-pickup points located in nearby convenience stores the next day. We expect to roll out its operation nationwide based on our ongoing assessment of the business progress.

As a mass market and high-frequency essential consumption scenario, bike-sharing business is strategically important to Meituan in the long term. It also represents tremendous market opportunities and supplements well to our existing high-frequency businesses on the platform. For traditional bikes, we replaced around 1.5 million old bikes with new Meituan Bikes during the quarter. The average turnover rate per bike improved incrementally, and the business' unit economics also improved.

Additionally, we also launched more than 290,000 e-bikes. During the quarter, the average turnover rate per e-bike was much better than the traditional bikes. We believe e-bikes have a bigger total addressable market and better unit economics as compared to traditional bikes. Its performance in the second quarter has already demonstrated a clear path to profitability in the near term. We have decided to proactively step up CapEx for e-bikes going forward and aim to be a leading player in this field.

With global COVID-19 situation continuing to evolve with many uncertainties ahead, global supply chain also face ongoing disruptions, which inevitably pull the Chinese economy recovery and depression. Considerable efforts and resources are still required to fully recover local consumptions. As the leading e-commerce platform for services, Meituan will continue to fulfill our social responsibility, especially in supporting merchants for their recovery, their operational digital transformation and sustainable growth and in upgrading consumer experience with better products and restored confidence. We will help to further boost consumption growth and to recover local economies to the best of our ability, despite the uncertainty and challenges in the next few quarters. We believe that our philosophy of focusing on the long-term growth and rewards will continue to yield positive results for all participants in the Meituan ecosystem.

With that, let me now turn over to Shaohui to discuss our financial results for the quarter. Please.

[Shaohui Chen, executive]

Thank you, Xing. Hello, everyone. I will now go through our second quarter financial results. In the second quarter, total revenue increased by 8.9% year-over-year to RMB 24.7 billion, primarily driven by the steady recovery of our core business and robust revenue growth of our new initiatives; and increased by 47.6% quarter-over-quarter on the back of gradual recovery from COVID-19 across different revenue streams sequentially.

Cost of revenues increased to RMB 16.1 billion in the quarter, which represented an increase of 9.4% year-over-year and an increase of 39.7% quarter-on-quarter. Cost of revenue as a percentage of total revenue was 65% in the quarter, remaining flat on a year-over-year basis and decreased from 69% in the first quarter of 2020. The quarter-over-quarter decrease of 3.7 percentage points was mainly due to the improved gross margin of our food delivery segment, the improved operating leverage of our in-store, hotel & travel segment throughout the pandemic recovery period and the change in revenue mix for our new initiatives.

Selling and marketing expenses increased to RMB 4.2 billion in the quarter from RMB 4.1 billion in the same period of 2019 and RMB 3.2 billion in last quarter. The significant increase on a sequential basis was primarily attributable to higher transaction user incentives for our major business and the increased spending on promotion and advertising during the recovery period. Selling and marketing expenses as a percentage of revenue were kept under control in this quarter and dropped to 16.9%, representing a decrease of 1.4 percentage points from the same period of 2019 and a decrease of 2.2 percentage points from last quarter.

R&D expenses as a percentage of total revenue increased to 9.6% in the quarter from 9% in the previous year period, mainly driven by increase to headcounts and share-based compensation. The decrease of 4.1 percentage points from last quarter was driven by our improved operating leverage.

G&A expenses as a percentage of revenue were 4.7% in this quarter, remaining flat on a year-over-year basis and decreasing by 1.7 percentage points on a sequential basis as a result of our improved operating leverage.

Operating profit turned to positive RMB 2.2 billion in this quarter compared to an operating loss of RMB 1.7 billion in the last quarter. Meanwhile, operating profit increased by 95.5% year-over-year, while operating margin increased from 4.9% in the prior year period to 8.8% in the quarter.

On a consolidated basis, our adjusted EBITDA improved from both a year-over-year basis and a quarter-over-quarter basis, reaching RMB 2.6 billion in the quarter, while adjusted EBITDA margin further increased to 10.6% in the quarter from 10.3% in the prior year period and 0.2% in last quarter. Adjusted net profit turned to positive RMB 2.7 billion this quarter compared to an adjusted net loss of RMB 216.3 million in the last quarter. At the same time, adjusted net margin further improved to 11% this quarter from 6.6% in the prior year period and negative 1.3% in last quarter. Both sequential improvements to adjusted EBITDA and adjusted net profit were mainly due to our steady business recovery and the improved operating margin across all business segments.

Let's now take a look at our segment reporting, starting with our food delivery segment. During the second quarter, the reemergence of COVID-19 cases and the restrictive measures, such as delayed [indiscernible] openings, continued to negatively impact the recoveries of [indiscernible]. Further, the combination of our ROI-focused subsidy strategy, effective [indiscernible] management program and the various promotion campaign effectively stimulated the recovery of consumer spending during this quarter.

We also continue to see more merchants shift online, which helped to provide consumers [indiscernible] and high-quality supply. As a result, the order volume of our food delivery business delivered positive year-over-year growth in the second quarter, with the daily average number of food delivery transactions increasing by 6.9% year-over-year to 24.5 million.

The average order value was RMB 48.8 in this quarter, representing a year-over-year increase of 9.4% and a quarter-over-quarter decrease of 6.1%.

Year-over-year increase was mainly due to the increased contribution from high ticket-sized orders and in particular, those orders from branded restaurants. The quarter-over-quarter decrease was mainly due to more small- and medium-sized restaurants resuming their operations during this quarter. The delivery GTV increased by 16.9% year-over-year to RMB 108.8 billion in the quarter.

Meanwhile, the continuing recovery of merchant operations and consumer consumption led to a strong demand for marketing solutions from merchants during this quarter. The pandemic has accelerated the [indiscernible] operation process, and [indiscernible] the mix of high-quality supply on our platform during the period. Notably, a number of newly onboard branded merchants increased by more than 110% in the second quarter as compared to the prior year period.

As many restaurants realize the potential for synergies between food delivery and in-store dining to reach consumers and execute effective online marketing campaigns, more restaurants adopted our online marketing services, and many of them used the commission rebates that we offer to purchase our advertising products during the pandemic period. These factors helped to drive the rapid growth of our online marketing services during the period, which increased by 62.2% year-over-year and accounted for 12.3% of our total food delivery segment revenue in the period as compared to 8.6% in the prior year period.

Meanwhile, our monetization rate decreased by 0.4 percentage points to 13.4% in the period as a result of high user subsidies and the higher portion of orders from branded restaurants on our platform, some of which may have certain discount or commission rate. As a result, food delivery revenue in the quarter increased by 13.2% year-over-year to RMB 14.5 billion.

On the cost side, efficient delivery capacity, [indiscernible] and higher delivery efficiency allowed us to reduce our delivery cost per order in the second quarter on a sequential basis. As compared to the first quarter, the lower average order value and higher user incentives in the second quarter were partially offset by the lower delivery costs and increased contribution from online marketing revenue. As a result, operating profit for our food delivery business turned to positive RMB 1.3 billion in the second quarter compared to an operating loss of RMB 70.9 million in the first quarter, while operating margin turned to positive 8.6% in the quarter from negative 0.7% in the first quarter.

Operating profit for our food delivery business in the quarter increased by 65.7% year-over-year, while operating margin in the quarter improved by 2.7 percentage points year-over-year. This year-over-year improvement were mainly due to the higher average order value and increased contribution from online marketing revenue, slightly offset by higher subsidies for transacting users that we disputed to drive order volume growth.

Now turning to our second segment, in-store, hotel & travel, in which revenue was down by 13.4% year-over-year in the second quarter. Overall, our in-store business continued to recover at a slower pace than in net food delivery business due to the ongoing presence of pandemic, precautionary measures as well as the lack of sufficient consumer confidence for certain discretionary in-store consumption.

As such, commission revenue for our in-store segment continued to experience negative year-over-year growth. However, the year-over-year decline in commission revenue for our in-store segment narrowed significantly from the first quarter as a result of our efforts to develop, innovate products online, various promotional campaigns and distribute e-Vouchers through our collaboration with local government.

Meanwhile, we also saw the online marketing demand of our in-store merchants gradually picked up during the recovery process. In particular, the nondiscretionary category of consumption, which did not involve large gathering, enjoyed growth momentum. As a result, the online marketing revenue from our in-store segment was flat as compared to the same period the last year.

Meanwhile, the pandemic continues to have a significant impact on our hotel business, which still lack the high [ several ] of our other in-store service category as a number of domestic room nights consumed on our platform increased in the quarter by 17% year-over-year.

In addition, as hotels stimulate consumptions by increasing discounts during the second quarter, our average daily rate per room night decreased on a year-over-year and quarter-over-quarter basis.

Operating profit for our in-store, hotel & travel business were RMB 1.9 billion in this quarter, representing a decrease of 11.9% year-over-year and an increase of 178.1% quarter-over-quarter. Meanwhile, operating margin increased by 0.7 percentage points year-over-year and 19.6 percentage points quarter-over-quarter to reach 41.6% in this quarter. The quarter-over-quarter improvement was mainly due to the improved marketing efficiency and operating leverage. The year-over-year improvement was primarily attributable to the year-over-year decrease of 4.5 percentage points in sales and marketing business as a percentage of revenue, which resulted from the decrease in user incentives, primarily for hotel bookings, and that was partially offset by the increase in research and development expenses.

Let's now turn to our third segment, new initiatives and others. The majority of our new initiatives on the brunt of the pandemic impact in the first quarter have gradually recovered during the second quarter, with segment revenue increasing to RMB 5.6 billion in this quarter, up by 22.1% year-over-year and 35.2% quarter-over-quarter.

Notably, during the second quarter, our B2B food distribution services achieved a revenue growth of more than 30% year-over-year. Meituan Instashopping achieved revenue growth of more than 70% year-over-year, and Meituan Grocery achieved revenue growth of more than 4x that of the prior year period.

Operating loss for our new initiatives and others segment expanded by 7% to negative RMB 1.5 billion in the quarter from negative RMB 1.4 billion in the last quarter, while operating margin improved by 6.8 percentage points on a quarterly basis to negative 25.9% in the quarter. This quarter-over-quarter improvement was mainly attributable to the decrease in provision for impairment losses and financial assets as well as to improve operating leverage.

On a year-over-year basis, segment operating loss narrowed 11.3% in the quarter, while operating margin in the quarter improved by 9.8 percentage points. This year-over-year improvement was primarily attributable to the improved operating margins of our bike-sharing business, restaurant management system business and the micro loan business.

Now moving on to our cash position. Operating cash flow turned to positive RMB 5.6 billion in the second quarter of 2020 from negative RMB 5 billion in the first quarter of 2020. As of June 30, 2020, our cash, cash equivalents and short-term investments totaled RMB 58.5 billion, increasing from RMB 56.5 billion as of March 31, 2020.

Overall, we believe our strong set of results, along with the recovery during the second quarter, which is a testimony to the resilience of our business model, our ability to better serve merchants, stimulate consumption through strong operating -- operational capability, our consistent [indiscernible] to improve our own operating efficiency and our long-term monetization potential. Nevertheless, profitability is not our short-term focus, and we remain committed to investing in this ecosystem so as to help merchants ensure they endured the challenges of post-pandemic period, drive industry recovery and [indiscernible] for long-term growth.

Based on our ROI assessment from long-term perspective, we also plan on actively exploring most new business opportunity that we believe we will benefit from the trend of accelerated digitization, has promising market size potential and the favorable long-term rewards.

Going forward, for example, we plan on setting up our investment in both grocery retail and e-bike. We believe that we are well positioned to capture attractive opportunity in local service space, generating increasing value for consumers and merchants and delivering lasting value for our shareholders over the long term.

With that, we're open for Q&A.

[Operator]

[Operator Instructions] First question is from the line of Ronald Keung of Goldman Sachs.

[Ronald Keung, analyst]

So congratulations on the strong results and particularly on the solid food delivery profitability, around CNY 0.60 of EBIT per order this quarter, so particularly when we're kind of over this recovery process in the second quarter from COVID. So can you share just, is there a contribution from a decrease in delivery rider costs? And how should we think about this rider cost trend from here, given that we have kind of different drivers here that the ample labor supply, as you mentioned, kind of 3 million riders, as China's workforce shifts from the older economy to now into the new economy? And the second drop of rider cost in share on autonomous vehicles in the future, how should we think of profit per order particularly in the delivery rider cost trends?

[Xing Wang, executive]

Thank you, Ronald. Yes, you are right. As you point out, delivery cost per order decreased, a very important driver for the jump of our operating profit this quarter. Well, there are several points. So first, food delivery has a strong seasonality. And delivery cost per order in Q2 is usually the lowest compared to other quarters. So this year, weather condition usually -- well, usually, every year, weather condition are favorable across the nation in Q2, which will lead to less incentive paid to delivery riders for working under extreme weather conditions. So food segment profitability in Q2 was usually well acted.

And second, this year, our operational capability for delivery network has been further strengthened. And specifically, we further optimized the order dispatching process and made the mobilization of riders across different districts more flexible. That means we can dispatch -- we can do dispatch and routing in a bigger area that can create more economy of scale. And so increasing -- that increased the overall delivery efficiency in Q2.

And third, due to the probably negative impact to the travel market, delivery rider supply was abundant in the second quarter, and that contributed to some cost savings based on demand and supply dynamics. These positive factors helped mitigated the higher costs associated with virus containment and the government's temporary VAT exemption policies granted to our delivery partners. So as a result, our delivery cost per order decreased slightly on year-over-year basis.

Well, actually, as you probably know, I don't really like to talk about quarterly numbers. Yes, we would like to focus more on longer term. So I will explain what's going on here. So in this -- in the second half of this year, delivery cost per order with [indiscernible] seasonality at the previous year and will go up as compared to Q2. And our efficiency improvement will may -- will help offset the one-off additional cost associated with the pandemic.

In the longer term, as we continue to grow the scale of our food delivery business, we will improve the operational capabilities and optimize the algorithm of our dispatch system. And we believe we could still further enhance our delivery efficiency and further lower the delivery cost per order. Well, I'm not sure it will be very significant, but I think there's still some room.

In addition to that, we have been developing our autonomous delivery technology for several years. That, I think, once adopted, will likely have the most meaningful impact to exactly improve our every efficiency and structurally lower delivery cost per order. So we are working on that. We have been working on that for several years. We believe it's coming but not anytime soon, so that's for the long term. So be patient. I think in the coming quarters, in the coming years, I think we are going to be able to continually lower the cost, either by better routing, dispatch in algorithm or by ultimately the autonomous delivery technologies. So just be patient. Thank you.

[Operator]

Next question is from the line of Thomas Chong of Jefferies.

[Thomas Chong, analyst]

Congratulations on a strong set of results. My question is about the food delivery business. The AOV of food delivery has slightly decreased from the high level in Q1. How should we expect the further trend of AOV? On the monetization side, any room to take up the restaurant take rates in second half and beyond? If off-line remains under pressure into 2021, could we choose to limit the take rate increase to help merchants and to prevent any backlash? Will it continue to limit the overall profitability improvement?

[Xing Wang, executive]

Thomas, thank you for the question. Yes, AOV in Q1 was elevated by the increased number of branded and high-quality restaurants, as we discussed in our last earnings call. In Q2, many of the smaller restaurants that shut down or closed during the peak of the pandemic reopened in Q2. So as a result, AOV was lower with the influx of these recovered orders. So this decrease in AOV actually was a sign of the expected recovery of our [indiscernible] business and we think maintains expectation.

In Q2, only around 30% of the [ campus ] orders recovered due to COVID-19 containment policies. It is likely that AOV will further decrease from the COVID level and normalize with a greater portion of the smaller restaurants as well as low ticket-sized [ campus ] orders come back online in the second half of 2020.

However, it's worth noting that overall trend on every structural, the post-pandemic level will likely be relatively higher than the prepandemic level because almost high side, food delivery merchant plays on -- food delivery merchant plays in our platform will continue to be upgraded as more established chain restaurants open up and live delivery channels.

On the demand side, more consumers have also demonstrated their willingness to pay premium for higher-quality, larger ticket-sized order food items from more expensive restaurants and for more consumption scenarios.

Yes, I think it's good that you raised the question about the monetization rate of food delivery and the profitability for food delivery. I think providing merchant support and driving industry's recovery in terms of continued uncertainty is and will continue to be our top priority. Giving monetization not profitability will be our focus right now. We made commitments to provide various forms of support to selected restaurants in the cities impacted by the recurrence of COVID-19 in the second half of 2020. We will continue to bring more popular, diversified and high-quality suppliers, especially established chain restaurants to our platform, which, in turn, may have slight negative impact on our monetization rate.

In addition, we [indiscernible] to drive order volume growth and continue to drive online penetration rate.

As we have talked many times before, we remain very confident around the monetization potential of food delivery business and remain very confident on the food delivery's long-term growth potential. We also remain very confident on our further solidified leading position in this food delivery business. But we are -- be more patient in terms of further increased monetization rate.

As we discussed earlier, seasonality has also been an important reason in improved profitability in this quarter. So you should not expect the same level of profitability during the rest of this year. Q2 usually compares in terms of the economics in food delivery. In the longer term, monetization rate improvement will be a major result as we continue to create unique values for our consumers and merchants.

[Operator]

Next question is from the line of Eddie Leung of Bank of America Merrill Lynch.

[Eddie Leung, analyst]

A couple of questions on your food delivery business. Number one, should we expect the growth trend probably get back to normal in the upcoming quarter? We have seen order recovery be nicely in the second quarter but still below last year kind of like 40% GMV growth. And then number two, besides order growth, any other key area or metrics you would focus on for your food delivery business are going forward? For example, would diversification of categories or AOV a metric? And then, finally, could you also comment a little bit on the competitive dynamics? It's interesting to see one of your peers starting to work pretty closely with fintech affiliate, and it seems like you guys are also talking about driving your fintech business. So anything -- any color on competitive dynamics as well as strategy will be helpful.

[Xing Wang, executive]

And thank you, Eddie. So in Q2, there were some new COVID-19 cases in Beijing. So that's driven renewed restriction measures by local government, and immediately, order volume dropped in Beijing and surrounded areas. Thanks to the quick responses and very effective various containment measures, so our food delivery business in Beijing stabilized within 1 month. So overall, the impact in Beijing was not material.

In terms of further recovery, the number of active food delivery merchants was more than 10% higher than its prepandemic level. Food delivery order volume was more than 5% higher than the prepandemic level at the end of June. And in August, the daily peak of our food on-demand delivery orders, including both food and nonfood categories, that exceeded 40 million. That was a record high. I remember last July, last year, we exceeded 30 million. And in early August this year, we exceeded 40 million. So we expect the volume to grow bigger and bigger. And in Q3, we expect food delivery business to keep good growth momentum on a year-over-year basis.

Given the COVID-19 is under good control quarter-to-date, we only see the recurrence happened in very few cities, [indiscernible], where order volume is limited anyway. However, in Q4, the growth of food delivery volume may still have uncertainties. We may see negative impact on order volume if COVID-19 happens in higher-tier cities or last longer. So we should be prepared. Nobody knows [indiscernible].

And on competition, our leading position was further solidified during this quarter. Short-term market share fluctuation is not our focus. We think that competition will be more rational in the long term, and all players will eventually focus on high-quality growth.

Meanwhile, we also remain very confident on our competitive advantages. And because we are the leading player in terms of consumer base, merchant base, delivery network and overall operational capabilities, we have both better technology, more data. We will continue to build our fundamental capabilities and create more values for both consumers and merchants and continue to drive the industry growth for longer -- long-term perspective.

So now food delivery has proven to be the essential means of many people's steady life, and it has evolved into a real mass market business. We will further increase the variety and quality of supplies to improve the consumers' experience. And we will also continue to help merchants improve online operation to optimize the efficiency and adopting more cutting-edge technology and innovating more new operating models to needed revolution of the whole industry. And we will focus on that in the future.

During this accelerated process of optimization for both supply and demand side of the industry, we have become more and more confident that food delivery service will become the new infrastructure service for Chinese urban population. And there will be ample room for growth, not just for food delivery but also for other service extension in the long term. And we remain confident that we are going to keep growing the volume of food -- online food delivery. And I think we are going to get to 100 million orders per day in a few years. So yes, we -- now we remain focused on this, and we are confident about this. We will keep working on this. Thank you.

[Operator]

Next question is from the line of Alicia Yap of Citigroup.

[Alicis a Yap, analyst]

Congratulations on the strong quarter. My question is related to your in-store business. While the business scale of the in-store segment has actually -- has yet to be fully recovered, as we actually see year-over-year decline in the second quarter, however, the operating profit has rebounded to a comparable level or even slightly better than last year level. Could you share more details on the driver for this performance? And how should we expect further recovery of this in-store business into the second half and overall profitability trend for this business?

[Xing Wang, executive]

Thank you for the question, Alicia. So for in-store business, firstly, advertising revenue in Q2 has almost returned to the same level of last year. However, revenue from transaction-based products still need more time to fully recover. The heightened related consent from consumers as well as cloud restrictions from local government continue to impact the pace of recovery. So we saw diverging results across different in-store service categories in Q2. The recovery for some lifestyle services was better than that of [indiscernible]. [indiscernible], such as medical, aesthetic, health care and pet care showed more resilience and saw stellar AOV growth in Q2. However, services that involve big crowds of gatherings, such as off-line education, pay TV and fitness are still recovering at a much slower pace and showing clear negative year-over-year growth.

For in-store dining, we continue to see the recovery of formal meals and gathering and lag behind the recovery of fast [ pleasure ] meals, which had a negative impact on Q2 recovery. In addition, in-store dining was more impacted by the new cases of COVID-19 in Beijing.

For hotel booking, the recovery still lag behind other in-store service categories. In Q2, hotels continue to optimize our operation and product to deal with the tough situation and stimulate consumption recovery. We further stratified our merchant base on category and scale and roll out more tailored service to them. Our upgrade product service [indiscernible] the different online marketing needs.

So I think in the longer term, the COVID-19 situation actually could help merchants be more urgency of building a strong online business. And we also have positive impact for consumers when they are using more online service during this period.

In Q3, as COVID-19 is well controlled, we expect to see further recovery for most service categories. And segment revenue is likely to trend to slightly positive year-over-year. We will continue to roll out various promotional campaigns, strength the collaboration with local government and provide more tailored products/services for merchants.

For longer term, there is still uncertainty. We will keep an eye and update to you.

In terms of profitability, the blended margin of in-store services declined year-over-year due to a negative impact from COVID-19. The year-over-year margin improvement of the entire segment was mainly due to the control of user incentives of hotel business as well as a much lower revenue contribution from hotel bookings and [ attraction 15 ], which easily have lower margin than other in-store services.

In the second half of 2020, we plan to set up our user incentives for hotel booking to stimulate volume recovery and may also increase our overall branding and marketing expenses for our in-store service. We expect the overall margin for this segment may decline from that of Q2. On the longer term, there is still room for margin improvement for this segment. Thank you.

[Operator]

Next question is from the line of David Dai of Bernstein.

[Hao Dai, analyst]

Congratulations on a good set of results. My question is regarding the hotel business. Can you please update the status of recovery for long-term -- long-distance trips as well as business travel? And what is the recovery trends that you have been observing in the summer? And during the recovery process, is there any opportunity for Meituan to gain some market share in the hotel booking industry?

[Xing Wang, executive]

Yes. Thank you for the question, David. As we talked last quarter, hotel bookings are probably one of the most [indiscernible] during the pandemic period, also was one of the slowest in terms of recovery. As of the end of June, the daily number of domestic room nights consumed on our platform was over 80% of their prepandemic level.

To share with you a few observations for Q2 and for recent months. First, hotel booking for intra city bounced back the fastest and achieved over 25% year-over-year growth already, which contributed to the fast recovery of our hotel booking business compared to other players. Second, the recovery of hotel bookings for long-distance, cross-city trips has not gone back to our expected level due to consumers' hygiene concern. Third, lower-tier cities, which were less affected by the pandemic, recovered faster than Tier 1 and Tier 2 cities. And room nights booked in lower-tier cities in Q2 already back to the same level of Q2 in 2019.

And in recent numbers that we are checking that overall hotel room night growth has turned to positive in our platform. Some traditionally has been the peak season for the bookings, and we expect to see this ongoing improvement on hotel booking on our platform. Given the structural advantages, our domestic room night growth may turn positive on a year-over-year basis in the whole Q3.

In terms of market share and competition, [ more hotels ] choose to work with us in various aspects and were eager to extend their sales channel. We provide hotel across the nation with an efficient online channel to access wider group of consumers during the recovery, especially to younger generation who's more active during the recovery.

Meanwhile, we have also helped them to cross-sell nonlodging services as a one-stop service platform. As a result, the percentage of room nights from high-star hotels on platform reached record high of over 15% in Q2. We believe that the trend will continue, and we have a good opportunity to further solidify our leading position in terms of the next room night. In a longer period of time, we are also very confident we will build leadership in our hotel booking GMV and hotel booking revenue.

[Operator]

Next question is from the line of Kenneth Fong of Crédit Suisse.

[K. Fong, analyst]

Congrats on the very strong set of results. Recently, Meituan have made a significant investment in Li Auto, and we totally understand about like the big potential for this electric car industry in the future. However, given the very little synergy, it could be found with existing Meituan business. Could management share with us more about the rationale for this investment?

[Xing Wang, executive]

Okay. Thank you, Kenneth. So let me explain this way. So first, I'd like to explain why I believe Li Auto is a good investment, and then I will explain why it's a good investment for Meituan. So okay. Now Li Auto has went public, most investor will think they understand the bigger potential of this industry. I would say most investors still underestimate the potential of this industry and this company, just as most people underestimated Tesla 0.5 year ago or 1 year ago. So here, I think Li Auto is going to be a very, very good investment because of the market is huge, it's huge. And also, the founder, Li Xiang, is a top-tier entrepreneur. And third, they have a very good product. They focus on only 1 product, Li ONE, and I drive a Li ONE every day, and I like it every minute. It's a very good product. I think it's going to be a very, very big success in the next year.

And also, I think most people underestimate the founder vision. So I think, finally, we are going to see a top-tier Chinese tech entrepreneur who has never gone to college. So he's capable of thinking different. I really mean it. He can think different. So he understand start-ups. He understand cars, and he understand an EV. So I think he's a visionary entrepreneur and who can go down to earth and manage many details. So I'm very confident in this entrepreneur and the team he has built and the product they have designed and manufactured and delivered. So in one sense, I believe Li Auto is going to be a very, very successful company. So I think that's going to be a very good investment.

Now I will explain why I think Li Auto will be a good investment for Meituan. Yes, I think there are 2 key words: the first is the mobility; the second is long term. So when I say long -- we have repeated many, many times, we like this in the long term. Here, long term, we don't mean several quarters. We don't even mean 1 year or 2 years. We mean at least 5 years, 10 years, if not decades. So I understand not every investor can stay with us for that many -- that much long time. But I think that's the way we are going to operate the company. So here, we -- the key word is long term.

And so Li Auto is working on autonomous driving, and they are also mapping technology. And also, they are working on novel human vehicle interaction, including voice recognition and many others. So all these efforts are expected to have synergies with Meituan in the future. Not now, not next quarter, probably not even next year. They are going to have synergies with us in the long-term future.

And also, mobility. So remember that the mission of Meituan is to help people eat better, be better. So we are very focused on helping people eat better. Actually, we don't grow food. We don't cook food. We don't prepare food. What we do is to deliver food. So essentially, Meituan is a mobility company. So that's what we do. So we deliver something. So vehicle is important for us.

Now we are at a very unusual time when vehicles are switching from our [ internal ] combustion engines to electric models. So EV is going to be really huge trend that changes every industry. Most people don't understand that the reason -- one of the most important reason that Meituan can dispatch such a big scale of online food business is because of e-bikes. So in the U.S., they initially drive a 4-wheel vehicles to deliver a lunch box. That just doesn't make sense. Here, we can use one very small EV. They are also vehicles. So there's no electric cars. They drive electric bikes. So that's very efficient, and that's very cheap. So in some sense, Meituan is already a big beneficiary of the EV revolution. We would like to double down on this. We believe EV, not just e-bikes also [indiscernible] cars are going to be the future. So we want to be part of that future. So that's why we don't hesitate to invest in Li Auto. So I hope people can understand why we do this because mobility, that's what we do. And because of we have to think long term. So that's the reason. Thank you.

[Operator]

Our last question is from the line of Jerry Liu of UBS.

[Yuan Liu, analyst]

Actually, that was very interesting comments on EV. And I wanted to maybe ask about also your long-term outlook and strategy, but in this case, on the groceries delivery business because investors are very interested in the new initiatives increasingly. And the groceries business, in particular, because this is probably the most important one in the segment and also a very important business post-COVID. And it's also very nascent, and there are a lot of competitors today. So we'll love some clarification, some color on how you're looking at the opportunity.

[Xing Wang, executive]

Thank you, Jerry. So you're absolutely right, the grocery retail will be very important for us. So it has always been very strategically important new initiative for us. So we all know market potential is tremendous in China. Okay, again, remember that the mission of Meituan is to help people eat better and live better. So there are several ways people can eat. The first, they can go out to find a good -- find a good restaurant, sit down to have a good dinner. So we have Meituan Dianping help people find good restaurants.

And second, people would like to order prepared food, prepared meals, meals delivered to them. So we have Meituan Waimai, so it can bring about 30 to 40 million meals per day.

And another way people can eat, some people still like to order to buy produce, buy grocery and then prepare food for themselves. So that's another market that we need to address. So we have been doing online grocery for, well, several years. We try several models at the same time. So we have Meituan Instashopping. So that's part of Meituan Waimai in the beginning. So we will further invest to better leverage the marketplace model. And also, we have already the largest and the most efficient on-demand delivery network. We are going to enable more diversified merchants, providing variety of goods to our consumers. And this business will have a very wide geographic coverage nationwide because that's a marketplace model.

And second, for the self-operated Meituan Grocery, [indiscernible], we will focus on increasing warehouse entity in existing cities. Because for self-operated model, it's very important to have density because higher density means better unit economics. We are going to improve our supply chain capability. That means we are going to operate warehouses. And while it's not easy, we are going to do what we need to do in order to win that market. So we are going to produce -- provide high-quality fresh produce to communities in mostly top-tier cities. So this business will also leverage our on-demand delivery network.

And last but not the least, we have a new model, that's Meituan Selected, [indiscernible]. It will use community group purchase model to provide value for money, selected groceries to communities in lower-tier cities.

So given the enormous market opportunity in this grocery business, so various business model have evolved with the market players emerging. So you are totally right, it's a very competitive market. Many people are trying. There are already several start-ups that does online grocery, and that has been valued at billions. And also, all other big e-commerce players are getting into these markets, including Alibaba, JD, and potentially [ TDD ] and many others.

But well, as a company, Meituan has never been afraid of competition. So we believe this is what we need to do because our mission is to help people eat better. So online grocery is a very important business for us, potentially the most important initiative for us.

In the past several years, I think we are already winning the online food delivery market. So online grocery is the next market that we are determined doing. So we are determined to allocate efficient -- sufficient resources in this industry. We are going to put our best team on that. And we are going to try much more models. But we will assess our investment from a long-term perspective. We are going to improve the efficiency of various business model along the journey. So I think in one sense, we are very determined to win the online grocery market. So I think we will see in the next quarter -- several quarters, we are going to see the progress in the next several years. I believe it is going to be a very exciting business. With many people trying, the business will eventually covering hundreds of millions of people. So yes, we are very excited about online grocery. We are going to go out for and to win in this market. Thank you.

[Operator]

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. And for closing remarks, I would now like to hand the conference back to Ms. Scarlett Xu. Please go ahead.

[Scarlett Xu, executive]

Okay. Thank you for joining our call. We look forward to speaking with everyone next quarter. Thank you.

[Operator]

Thank you. Ladies and gentlemen, that concludes our conference for today, and thank you for participating. You may now all disconnect.