Meituan

HKEX:3690

Earnings Call Transcript 2021-Q2

[Operator]

Good day and thank you for standing by. Welcome to the Meituan Second Quarter 2021 Earnings Conference Call. [Operator Instructions]

Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference to our first speaker today, Ms. Scarlett Xu, Vice President and Head of Capital Markets. Please go ahead.

[Scarlett Xu, executive]

Thank you, operator. Good evening and good morning, everyone. Welcome to our second quarter 2021 earnings conference call. Joining us today are Mr. Xing Wang, Chairman and CEO; and Mr. Shaohui Chen, Senior Vice President and CFO of Meituan. For today's call, management will first provide a review of our second quarter 2021 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 that may differ from actual results 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 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]

Well, thank you, Scarlett, and hello, everyone. Welcome to Meituan's Second Quarter 2021 Earnings Call.

In the second quarter of 2021, our various business segments remained on healthy growth as the Chinese economy continued to recover steadily and as we continued to digitize the offline and service economies.

In Q2, annual active merchants and annual transacting users saw faster year-over-year growth versus Q1, reaching 7.7 million and 728 million (sic) [ 628 million ], respectively. The average number of transactions per transacting user increased to 32.8x for the trailing 12 month of Q2 2021 compared to 25.7x for the trailing 12 months of Q2 2020.

We served more merchants and helped accelerate their business digitization. We also strived to better serve consumers, providing them with a more diversified, more convenient and more value-for-money services and products. As a technology platform, we will continue to use our technology-empowered system to improve off-line business and supply chain efficiency, creating more commercial and social value in return. At the same time, we will continue to develop our business around the mass-market consumer while fulfilling our mission to help people eat better and live better.

Now let's start with food delivery. We continue to bring a wider range and greater quantity of merchants online to better meet the consumers' increasing diverse needs. In Q2, our total food delivery orders grew by close to 60% year-over-year with a 2-year CAGR of more than 30% as measured from the second quarter of 2019. On the consumer side, we continued to broaden the variety of consumption scenarios available on our platform, provide longer-distance deliveries and implemented more targeted operational strategy for merchants to better meet the consumer growth needs of food delivery.

By the end of June, food delivery annual transacting users has increased by 16% year-over-year, with most of the new additions coming from lower-tier markets. Meanwhile, our monthly membership subscriber base also continued to hit new records, reaching over 59 million as of the end of Q2 and accounting for an ever-larger proportion of our total food delivery orders. They are scaling up. Consumers are also transacting more frequently on our platform with quarterly purchase frequency up 25% year-over-year. In addition, order contribution from the Black Pearl's afternoon tea and late-night snacks categories also grew meaningfully with orders from long-distance merchant contributing to a greater percentage of total orders in Q2.

On the merchant side, we focused on helping merchants to run their online business more efficiently. By conducting constructive and transparent dialogues with the merchants, we were able to better understand their business pain points and collect their firsthand feedback. Food delivery annual active advertising merchants and annual active advertising merchants also reached new highs in Q2.

Since May, we have been rolling out a new tiered pricing mechanism for merchants. It not only made pricing and cost structures more transparent for merchants but also provided merchants with more flexibility in delivery options. We believe this mechanism should help optimize the food delivery industry's operation over the long run.

We also launched the "Food Delivery Manager" [Foreign Language] program to better support small and medium restaurants. This program is focused on helping restaurants set up and use online operations, covering such areas as operational diagnosis, operational optimization, store renovation, menu design, event planning, marketing and more. Results were notable as more than 6,000 merchants participated in the program and saw their average GTV grow by more than 50% versus before.

For the smaller merchants, we have continued to witness a trend of acceleration in their adoption of digital and online solutions. Their less dining-in and more delivery service business model had worked well for smaller restaurants in our merchant ecosystem. We will continue to support the larger -- the large number of small and medium merchants on our platform by helping them to acquire more consumers, lower their operating expenses and increase their operational efficiency.

In terms of our delivery network, in Q2, we came up with more differentiated delivery solutions for different merchant groups and consumption scenarios while continuing to strive towards delivering quality consumer services and increasing our delivery efficiency.

Our delivery services also expanded for more merchandise from food to medicine, supermarkets, convenience stores and so on. In the first half of this year, we hosted more than 85 panel feedback sessions with delivery riders through which we collected feedbacks and incorporated into our operations to further enhance our delivery riders' welfare. Over the past few quarters, on the back of our efforts to support delivery riders' family, We further upgraded our Baby Kangaroo [Foreign Language]. The program was designed to -- specifically to improve the well-being of delivery riders' children. Our other welfare programs also help delivery riders' families in times of need and sickness.

To help provide riders with long-term career planning, we initiated a Delivery Station Manager [Foreign Language]. And through this program, high-potential delivery riders have the opportunity to become managers and assume more responsibilities.

We are a technology company, so the research and development of cutting-edge technology is key to our business. In the future, to provide our delivery riders with more assistance and further improve delivery efficiency, we aim to assimilate our self-designed autonomous delivery vehicles and delivery drones into our delivery network.

During the recurrence of COVID-19, for example, we flew our delivery drones in Shenzhen's Nanshan District to provide the quarantined community with much needed daily necessities. And our autonomous delivery vehicles operated in cities such as Chengdu, Nanjing, Guangzhou, delivering grocery during the pandemic as well as -- in addition to Beijing's Shunyi District, where we had been running the program since the onset of the pandemic.

Now let's move on to our second segment. Our in-store, hotel & travel segment recorded a steady growth in Q2. During the period, we focused on building out our long-term capabilities in order to better serve merchants and consumers, ultimately helping to recover and grow domestic consumptions. We also leveraged the different holidays and festivals to launch category-specific promotional campaigns, which resulted in record transaction volume, GTV, and merchants number for our in-store business in Q2. We maintain a distinctive and strong consumption mindshare as the go-to destination for exploring local lifestyle as well as discovering quality merchants and value-for-money services.

For in-store dining, our GTV achieved a 2-year CAGR of more than 37% in Q2, accelerating from that of Q1. We also brought more high-quality and light meal options online and launched more transaction-based and advertising products. By providing merchants with a more differentiated operational strategies, we help them to better run their online and offline businesses. Our merchant supplies' increased diversity also attracted consumers to dine out and transact more in restaurants during the consumption recovery. As annual active merchants continued to hit record high, consumer transaction frequency and user stickiness also improved.

For other in-store services, GTV achieved a 2-year CAGR of close to 47% in Q2 as categories such as medical aesthetics, pet care and health care maintained their high growth rate. We also leveraged the various festivals and campaigns to bring more high-quality merchants online, satisfying the growing consumer needs. During the June 18th festival, for medical aesthetics category, GTV and number of transaction grew by more than 70% year-over-year during the promotional period. We also ramped up our self-owned business development team to cover more categories in broader, lower-tier markets, increasing the number of annual active merchants in turn. We believe, for these lower-tier markets, the need of both consumers and merchants have yet to be optimally matched and there is still ample room for further industry digitization. So going forward, we will focus on this approach in appropriate markets while also improving our products and operations to reach more consumers.

And for hotel booking, the intention and demand for traveling was stronger in Q2 versus Q1. This resulted in higher quarterly domestic room nights of more than 140 million of our platform, with the daily peak for the Labour Day holiday reaching more than 4 million. We also continued to strengthen our ability to provide our high-star hotel segment with better services and supply. For low-star hotels, we've solidified our leading position and continued to penetrate further into lower-tier markets through the accelerated digitization process and off-line traffic conversion.

Next, for our new initiatives segment, we continued to invest in key initiatives, especially around retail. In Q2, Meituan Select expanded our geographical coverage in China while also deepening its penetration into the lower-tier markets. At the same time, we increased our coverage of those counties that are less well-off, providing hundreds of thousands of villages opportunities to work as group leaders and increase these residents' income. For those who left their villages and now work in larger cities, Meituan Select rolled out a specific program that enabled them to conveniently order grocery for their parents back in their hometown with just clicks of a button. Orders from this channel exceeded millions in just 1 month. We also achieved a solid user growth by implementing new acquisition methods, which included programs to build a strong consumer mindshare and improve user experience. And during the summer, we built out our nationwide cold chain logistics to improve product quality and user experience as well as further enable the quality delivery of fresh produce.

Going forward, as we continue to channel our resources into developing our long-term capability for products, supply chains and logistics networks, we will also further improve our operating efficiency. Importantly, we will abide by regulatory guidelines for business development and help to facilitate a healthy, orderly and competitive environment.

For Meituan Instashopping, we continued to increase the number of merchants and categories offered on our platform. By deepening our relationship with FMCG brands directly, we are helping them to achieve more efficient marketing and wider distribution. Our medicine vertical, we launched the Yellow Light Project in Q2. By working with over 10,000 drugstores, pharmacies, we can deliver medicine on 24-hours-per-day and 7-days-a-week basis and solve people's most urgent medical needs at home.

As we increase our brand awareness, Meituan Instashopping's user growth accelerated with its quarterly number of transactions and GTV growing north of 140% year-over-year. Average daily transactions reached 3 million in Q2. And during the most recent Chinese Valentine's Day, Meituan Instashopping reached a peak daily transactions of more than 6 million.

For Meituan Grocery, we completed our coverage expansion of existing Tier 1 cities, that's Beijing, Shanghai, Guangzhou and Shenzhen, in Q2, growing GTV by over 280% and quarterly transacting user base by over 250% year-over-year. We also optimized our product structure and improved our warehousing and delivery logistics. Importantly, we were able to increase the segment's order density warehouse while also ensuring an optimal user appearance. Going forward, to improve our long-term unit economics, we will continue to enhance our supply chain and logistics capabilities as well as our operating efficiency.

As China's leading e-commerce platform for services, we have actively worked on shouldering more social responsibilities and creating greater value while promoting common prosperity for the larger society, including our delivery riders, merchants, consumers and other business partners. In Q2, we strengthened our long-term capabilities to help consumers discover better services. We also worked towards serving a greater number of merchants by ensuring consistent delivery experiences.

Our on-demand delivery network is not only about the delivery of food. Meituan Instashopping covers a wide variety of categories, including medicines, flowers, groceries, gifts and so on. Through new initiatives, we brought more convenience and more value-for-money products to consumers in lower-tier markets. We have to improve the logistical and delivery network of rural areas and streamline the distribution of products from this market.

For -- most importantly, we have not only continued to improve incentives of our delivery riders but also actively taken their feedback into consideration to better organize our delivery services. We also took steps to care for their personal and family well-beings as well as their long-term career path.

During the recent unprecedented flood in Henan, our delivery riders stood up against this natural disaster and helped consumers in their most urgent hours. In addition, our retail division opened up a warehouse inventories in Zhengzhou, donating food and daily necessities to people in need. And our hotel booking division reacted quickly and arranged relevant hotels to provide emergency shelter for the public as well. Our Meituan Charity foundation donated RMB 100 million to provide shelter and post-disaster health care services for the cause. We would like to continue to do the best we can and contribute back to our society.

Lastly, a series of regulatory policies and guidelines recently announced provided us clearer directions on how to improve our business operations. We will abide by these guidelines strictly and carry out our social responsibilities proactively. The new regulatory environment change will allow us to better remind ourselves of our societal role and stimulate ourselves to innovate and better contribute to our society at large using our technology to empower and digitize offline businesses.

We hope to further contribute to the quality development of national economy while improving lives of the broader population. We will live up to the higher expectations from our government, society, merchants, delivery riders, consumers more. We will continue to roll out our plans for sustainable development, bring more employment opportunities to more markets, boost consumption growth in less developed areas and carry out our carbon neutrality objectives in our daily operations.

We will always have our social responsibilities at heart and do the best we can to contribute to the growth and common prosperity of our broader society, always fulfilling our mission to help people eat better and live better.

And with that, I will turn the call over to Shaohui for an update on our latest financial results. Please go ahead.

[Shaohui Chen, executive]

Thank you, Xing.

Hello, everyone. I will now go through our second quarter financial results.

In the second quarter, our total revenue reached RMB 43.8 billion, increasing by 77% year-over-year. On a year-over-year basis, our business segments achieved healthy growth as we recover from the COVID-19 pandemic.

As a percentage of total revenue, cost of revenue was 71.4% this quarter, increasing from 65.3% in the prior year and decreasing from 80.5% in the prior quarter. The year-over-year increase was mainly attributable to the increase in food delivery-related costs, in line with the increase in order volume and the continued development and exploration in our retail business, while the sequential decline was as a result of seasonality and the improved fulfillment efficiency of our new initiatives. Meanwhile, we also allocated more resources to user incentives, employee benefits as well as promotion and advertising.

Selling and marketing expenses as a percentage of total revenue were 24.8% this quarter, increasing from 16.9% in the previous year and 19.5% in the prior quarter.

R&D expenses as a percentage of total revenue decreased to 8.9% from 9.6% in the prior year and 9.4% in the prior quarter mainly due to our improved operating leverage.

G&A expenses as a percentage of total revenue was stable, both on a quarter-over-quarter and year-over-year basis, at 4.7% this quarter.

Both our food delivery and in-store, hotel & travel segments maintained their steady growth in this quarter. As a result, the aggregate operating profit for both segments were RMB 6.1 billion in this quarter, increasing from RMB 3.1 billion in the prior year and RMB 3.9 billion in the prior quarter. Nevertheless, we recorded a total operating loss of RMB 3.3 billion in this quarter primarily due to the rapid expansion of our new business, especially our retail business. On a consolidated basis, our adjusted EBITDA and adjusted net profit declined to negative RMB 1.2 billion and negative RMB 2.3 billion, respectively, in this quarter.

Now moving on to our segment reporting. Starting with food delivery. Our strengths in consumer base, merchant base and delivery network remained strong in the second quarter, continuing to reinforce each other and enabling us to achieve solid growth. Both quarterly transacting users and quarterly purchase frequency achieved healthy year-over-year growth in this quarter, stimulated by our enhanced marketing efficiency, effective membership program and optimized operations of different consumption scenarios. Meanwhile, we continued to onboard more high-quality merchants as well as small- and medium- sized merchants. This helped us to further diversify our platform transactions and better satisfy consumers' ever-growing demand.

In line with these growth drivers, our food delivery business order volume maintained strong growth momentum with the daily average number of food delivery transactions growing by 59% year-over-year to achieve a 2-year CAGR above 30%. By the end of June, the majority of merchants in all of the cities in China where we have direct operations had upped our new fee structure. This had a limited impact on the blended monetization rate of food delivery. Monetization rate was stable on a year-over-year basis. However, it decreased by [ 1 ] percentage point on a sequential basis mainly due to a higher user incentives resulting from seasonality and marketing strategy. Total food delivery revenue was RMB 23.1 billion in this quarter, representing a year-over-year increase of 59% and a 2-year CAGR of 34%.

Operating margin for food delivery is normally the highest during the second quarter of the year as there's sufficient delivery capacity and less delivery rider incentives due to the favorable weather conditions. As such, during the quarter, both operating profit and operating margin improved meaningfully on a sequential basis to RMB 2.4 billion and 10.6%, respectively, partially offset by the higher user incentive ratio. In addition, our business scale continued to grow, and the daily average order volume surpassed 38.9 million orders in this quarter, further improving our order density. Better economics of scale and improved capacity mobilization also contributed to a higher operating margin for our food delivery segment on a year-over-year basis.

Now turning to our second segment. In Q2, our in-store, hotel & travel business continued to achieved outstanding results with the segment's quarterly revenue growing by 89.3% year-over-year. Notably, our in-store business transaction volume, GTV, and revenue all reached historic highs, achieving 2-year CAGR of 38%, 40% and 33%, respectively.

Our [ unrelenting ] focus on expanding our service variety, diversifying our merchant supply and launching various SIM-based promotion campaigns have enabled us to capture consumers' explosive demand for local services. Meanwhile, to meet the marketing needs of merchants in different industries, we have continued to diversify our transaction-based products, which helped merchants promote higher transaction frequency and better user acquisition on our platform in this quarter. As a result, our in-store segment's 2-year CAGR for commission revenue reached 37% in this quarter.

Meanwhile, local services merchants also displayed higher marketing demand as their business further recovered. To encourage more small and medium restaurant merchants, to try and use our advertising products, we continued to lower the price for subscription-based products, driving the adoption rate of our subscription-based services even higher in this quarter. In the meantime, more merchants also adopted our CPC advertising product this quarter, increasing the 2-year CAGR of our CPC advertising revenue to more than 45%.

With respect to our hotel business, although the broader industry has not yet fully recovered due to the recurrences of the pandemic, our domestic room nights increased by 81% year-over-year in this quarter. This was largely due to our structural advantages and strategic focus in the domestic market and the intercity travel scenario as well as our strong performance during the Labour Day holidays. Meanwhile, the contribution from high-star hotels also further increased on a year-over-year basis as we continued to strengthen our collaborations with hotels in this segment, enhance our customer service quality, improve our pricing strategy and step up our platform analytics.

Operating profit and operating margin for our in-store, hotel & travel business increased to RMB 3.7 billion and 42.6%, respectively. This sequential improvement was mainly attributable to the increase in business scale driven by seasonality and certain holiday promotional campaigns, partially offset by increase in user incentives for our hotel business. With the strong recovery with -- from COVID-19 and improved operating leverage, this segment's operating profit and operating margin both improved on a year-over-year basis.

Let's now turn to our third segment, new initiatives and others. During the period, revenue in this segment increased by 113.6% to RMB 12 billion driven by both the recovery from COVID-19 pandemic and the continuous development of our new initiatives to satisfy consumer's growing needs. The increase in revenue maintained from retail business, B2B food distribution services and bike sharing and moped services.

Operating loss for this segment expanded to negative RMB 9.2 billion in this quarter from negative RMB 8 billion in the last quarter. Our operating margin improved by 4.8 percentage points quarter-over-quarter to negative 76.8%.

Our retail business, especially our community e-commerce business, continued to be our largest area of investment this quarter. As a result, operating loss for our community e-commerce business further widened on a sequential basis as we continued to expand its business scale. Additionally, while we continued to cultivate consumer habits and expand our group leader base through incentives, we also continued to make substantial investment in further enhancing our supply chain and fulfillment in areas such as cold chain facilities, supply chain digitization and more.

The combination of our increasing business scale and this investment led to a noticeable increase in our community e-commerce business losses during this quarter. However we were pleased to see that we achieved gradual improvement in the overall unit economics of our community e-commerce business during the quarter. We were also delighted to see the operating margin of both Meituan Instashopping and Meituan Grocery improve on a sequential basis driven by operating efficiency improvement.

Now turning to our cash position. As of June 30, 2021, our cash, cash equivalents and short-term investments totaled RMB 122.5 billion. Additionally, during the quarter, our operating cash flow reduced to RMB 2.9 billion from RMB 5.6 billion for the same period of 2020, which was primarily attributable to our increased losses before income tax.

To conclude my prepared remarks, I would like to highlight several things. First, despite the recent regulatory changes, we believe that the industry outlook of our core business remains intact for the long term. Second, we have already opened positive progress towards our new initiatives to date, especially for our retail business. As we explore various new initiatives, we will maintain a committed and flexible investment pace, closely monitor the key metrics for each business line and continuously assess our progress. Lastly, while continuing to contribute in the real economic growth with innovation technology, we will continue to attend to the common interest and long-term growth of merchants and other parties on our platform. With our primary goal, we will continue to optimize our operating efficiency while focusing on long-term returns and creating great value to the society.

With that, we are now open for Q&A.

[Operator]

[Operator Instructions] We have the first question, which is coming from the line of Ronald Keung from Goldman Sachs.

[Ronald Keung, analyst]

Xing, Shaohui, Scarlett and team, I would like to ask on regulations that -- how do management think of the current business dynamics in this regulatory environment? Are there any adjustments to your current business operations or even profit outlook for each of the segments, in food delivery, in-store, community e-commerce? And how will you strike the balance between social responsibility and business efficiency?

[Xing Wang, executive]

Okay. So on -- I would like to start with some macro thinking because recently, there has been a lot of changes, and so people are concerned. But everything happens for a reason. So I would like to say they're all for common prosperity. I would even like to say common prosperity is built in the gene of Meituan. Actually it's even in the name of Meituan because the name Meituan can -- has the 2 Chinese characters. When I need to explain the name Meituan to people who don't speak Mandrin, sometimes I say Mei. The first character means good or better, and the second character, tuan, means together. So Meituan better together. So the common prosperity has always been built into our gene.

And with that, let us turn to our [indiscernible]. So recently, we have seen regulators introduce a series of regulations on the internet matter, focusing on matters ranging from antitrust data security, community e-commerce and so on. And the government supervision and the public concern and the voices of our partners, including merchants and delivery riders, are both warning and motivating for us as they present higher expectations for us from the directions. We believe that this regulatory change are good for the sustainable development and orderly growth of the internet platform economy. It promotes a fair competition and healthy industry development. This is not just in China. We see similar regulation trends globally as well.

We will continue to actively implement compliance requirements and improve internal control mechanism across all our businesses, conduct in-depth review and actively rectify any issues to ensure full business compliance and to avert risk. We have always maintained strict standards for data security and privacy protection. We will continue to strictly protect the user data in Meituan.

In terms of our delivery services, we have prohibited any use of an exclusive partnership and will be firmly against it. We will fully respect the merchants' choices and closely attend to the worker situation and welfare of delivery riders. For the retail business, we have actively adjusted our pricing strategy, and we'll grow our business with the long-term development. Although fine-tuning our business will inevitably bring some sequential subsequent potential impacts in the short term, we believe that with this adjustment, our best options will benefit us in the longer run.

Meituan is never meant to be a traditional Internet company. We are a platform that empowers off-line services. Compared to some peers, we are not a company that focuses on margins. The procurement costs and expenses to support our delivery network and retail services are actually quite substantial, and we have made a considerable investment in the ecosystem.

Actually, short-term profits has never been Meituan's philosophy. We focus more on generating long-term value, creating social output and striving, always fulfilling our mission to help people eat better and live better. Therefore, compliance, social responsibility and business development are all vital to Meituan's development plan. And our goal to run our business with a long-term development remains unchanged.

Although we had some imperfections during our growth, we will work hard to rectify any issues we may have always and always strive to improve ourselves. Our purpose remains unchanged, and we are confident that we can create greater social value while achieving greater [indiscernible] value.

Through technology innovation, we will continue to generate adequate and quality employment opportunities and bring convenience to consumers' lives. We will help accelerate the industry's [ destination ] and help small- or medium-sized merchants operate more efficiently and [indiscernible] create a more active, open and diversified market. We will also continue to bring more efficient logistics network which will supply to rural areas, helping farmers to increase their income and contribution to rural revitalization.

Furthermore, we will continue to pursue carbon neutrality through bike and moped sharing businesses to [ assist in ] future sustainable development. And we will leverage our advantages as a [indiscernible] platform and help people from all walks of life enjoy the benefit of digital economy, yes, as the -- our mission remains unchanged to help people eat better and live better. Thank you.

[Operator]

We have the next question. This is coming from [ Jang Yang ] from [ CITIC ].

[Unknown Analyst]

Okay. My question is also about the regulations.

And how do you view the recent regulatory guidelines on protecting workers on the new forms of employment as [Foreign Language] and as well as the guidelines on protecting delivery riders [ taking shifts ] for food delivery companies? In Chinese also, [Foreign Language]. And how will you adjust your delivery rider management and welfare?

[Xing Wang, executive]

Thank you, [ Jang Yang ]. Once the policy guidelines were published, our management team conducted an in-depth study of the documents. We believe that the guidelines have taken into consideration a holistic view of a new form of labor relations such as delivery riders. It clarifies the rights and obligations of all parties and introduces a series of practical, new measures. So these are important to promoting a sustainable and healthy development of the on-demand delivery industry.

We present a special working group to go through the guidelines, self-examine and self-improve based on our current practice. At present, we have already solved some of the problems and improved some of our practices. The others are also in work -- are work in progress. We will strictly follow the guidelines from the authorities and actively fulfill our responsibilities and make a greater effort to protect the rights of delivery riders, different labor relations.

At present, we have taken the lead in responding to the government's call to prevent and solve occupational injury risk and address riders' worries by actively participating in the pilot program for implementing delivery riders' occupational injury insurance. Going forward, we will cooperate with the authorities to provide a more comprehensive welfare scheme to the delivery rider group and promote the high-quality and healthy industry development.

In terms of improving delivery [ quality ] experiences, we will continue to upgrade our intelligent architecture system with the policy guidelines. We will improve the predictability of delivery time by adopting different operational strategies and take into consideration unfavorable or uncontrollable factors.

To provide the riders reasonable rest during long working hours, we will adjust our ordering system and introduce compulsory breaks for delivery riders. We will continue to provide better equipment and services, such as a smart helmet and battery change services for delivery riders' personal safety and improve their work convenience.

We are paying very close attentions to delivery riders' feedbacks and continue to improve the delivery riders' work environments. We will also continue to broaden the channel for feedback by holding more panel sessions or product experience workshops and do research and more.

In order to help delivery riders with their long-term career development, we initiated a Delivery Station Manager, that's [Foreign Language] in Chinese, by opening up a promotional channel for high-potential delivery riders. This program equips them to be station managers or delivery partner managers and so on. Meanwhile, we are cooperating with a vocational and national open institution to help delivery riders upgrade their occupational skills and academic degrees, improve their careers with switch mechanisms and achieve more diversified career development goals.

And the policies and guidelines issued by authorities this time have provided Meituan with a more specific direction and a clearer policy path, which is an instrument and also a motivation for the on-demand delivery industry and new form of employment.

We will definitely work hard to improve ourselves, set an example in the on-demand delivery industry with our own actions and promote the healthy and sustainable development of the company, the on-demand delivery industry and the food delivery industry. Thank you.

[Scarlett Xu, executive]

Thank you.

[Operator]

We have the next question. This is coming from Eddie Leung from Bank of America Merrill Lynch.

[Eddie Leung, analyst]

About regulation, just wondering if you could share some color with us on the long-term unit economics of the food delivery business given the various regulation changes.

And then separately, I think, Xing, you mentioned about technology early on to improve efficiency. So could you give us some color on the progress and any potential benefits that we can see in the coming years?

And perhaps just finally, any color on the potential impact from data-related regulation on our marketing solution and marketing revenue?

[Shaohui Chen, executive]

Thank you, Eddie. Yes, I will take the first question on the UE target and technology program.

Despite the increase of rider cost in the future with better welfare for delivery riders, we believe that improved welfare will help us improve delivery rider retention rate on our platform and thus promote the healthy development of the industry in the long run. Therefore, we remain confident on the UE target of food delivery.

And we believe we will further improve our delivery efficiency across the different ways. For example, we will more widely adopt the new delivery models such as the intelligent lockers, which proved to have shortened the delivery time in our operating areas while ensuring the good experience of both the delivery riders and the consumers.

And meanwhile, autonomous delivery has been our key R&D focus to improve delivery efficiency. We have actively invented and designed both autonomous delivery vehicles and delivery drones over the past few years as we believe that once widely applied, it could make significant positive impacts on our businesses.

We aim to construct a comprehensive on-demand delivery network with autonomous delivery like [indiscernible] our delivery riders and expect to improve the overall efficiency in the future. As of now, our autonomous delivery has been deployed in Beijing for over a year, accumulating nearly 50,000 delivery orders to date. In April this year, we launched the latest addition of our self-developed autonomous delivery vehicles and expect to deploy more widely over the next 3 years.

In July, we officially launched autonomous delivery drones. We have tested and developed our drone services for over 3 years now and have flied (sic) [ flown ] drones for actual orders since start of this year. As of June, we have accumulated over 2,500 delivery orders and 220,000 test flights using drones. During the period of pandemic recurrence current in Guangdong, we used drones to establish an air channel for transporting urban materials in Shenzhen's Nanshan District, delivering most important needed supplies to residents in this area. We also use our autonomous delivery vehicles to deliver essential supplies to quarantined people during the COVID recurrence in Nanjing and Shandong. We have also made investments to support the drones delivery startup and will actively contribute to the development of the field through in-house R&D and outward investments.

Overall, we believe that we have a marked approach to further improve delivery efficiency while increase order density in future. And we are confident that we can undertake more social responsibilities by achieving our long-term target for our food delivery business.

[Eddie Leung, analyst]

And Shaohui any impact on marketing solution given the data-related regulation?

[Shaohui Chen, executive]

Yes, sure. Yes. Yes, I think, first, we have carefully monitored their -- the new policy related to that. We think it's in line with the company's philosophy and policy that we should always pay high attention and protect our users' privacy and all the data accumulated to our platform. So I think we completely understand their -- the rationale behind their new policy and will strictly follow what -- their latest required.

Overall, we think this is the right move for the overall industry and potentially will have positive impact on the industry in the long term. It's also, I think, better for fair competition in the industry, for more healthy competition. We will continue to assess the impact on us and will -- for the -- what the regulators require. Thank you.

[Operator]

We have the next question. This is coming from Alex Yao from JPMorgan.

[Alex Yao, analyst]

Congratulations on a strong quarter. I have a couple of questions on ridesharing or shared mobility business. We noticed that Meituan has recently increased its investment in self-operated ridesharing business. How do you see the opportunities in this industry going forward? Is there any business strategy update you can share with us? And how much should we expect you to further invest into this business in the near future?

On the longer-term view, what is your expectation on profitability for the ride sharing services? And lastly, any comments on recent regulators' guideline on commission rates cap?

[Xing Wang, executive]

Thank you, Alex. So ridesharing is a, as we know, high-frequency mass-market category. And it has been one of our continuous experiments among many categories. We believe it has the potential. We started our ridesharing business, well, 4 years -- more than 4 years ago through the self-operated model. And then we further expanded geographic coverage through aggregated model because aggregation model is lighter. And our aggregated model has significantly expanded ride supply during the past few quarters.

While our self-operated model brings a better user experience by providing a stable and better controlled ride supply, especially during the peak hours, last year we only ran self-operated model in 2 cities. That's Shanghai and Nanjing. And -- however, we now believe that both our capability and market environment and -- have reached the point that we can expand our self-operating model in some more cities where we already have operations through aggregated model. And so since July, we further rolled out our self-operated model in more than 30 cities.

On the operational side, we will treat those cities that are strategically important to run self-operating model. While we continue to encourage drivers to cooperate with us to expand our capacity and enhance supply quality, we will also refine our marketing operations to boost the business growth. In the short term, marketing expenses will increase while we expand our business scale. Now we will maintain financial discipline to achieve a sustainable growth.

And the Ministry of Transportation recently commented that ridesharing companies need to restrict their commission rates on drivers. Once there is a further guideline on the cap, we'll apply it strictly. Currently, our commission rate complies with industry standards and vary from region to region and time to time. And we are still at an exploring stage for ridesharing business, and we'll control our cost to reasonable levels. We do not expect to have a significant impact to our operations.

After analyzing other ridesharing business both in China and also in other countries, we still believe our ridesharing business has potential to scale up and have a reasonable long-term prospective through the continuous improvement of its operating efficiency.

We could leverage our user base to develop our ridesharing business and can also cross-sell other Meituan services to our ridesharing users. And also, we believe that in the long-term, the combination of ridesharing and autonomous driving can create a more social and economic value prosperity. We are not focused on short-term performance but rather the long-term value that ridesharing creates for the broader community. That's all. Thank you.

[Operator]

We have the next question, which is coming from Thomas Chong from Jefferies.

[Thomas Chong, analyst]

After completing the national coverage, we saw Meituan Select order growth slow down in recent months. I think it's partially due to more rational product pricing and also because the company increased its investments in the cold chain capabilities during the summer. Have we seen anything change from our previous expectation after we started our community e-commerce business for a year now? And is there any adjustment to our thinking on the addressable market? And do we expect to significantly lower our growth target and investments in Meituan Select? And what's the key business strategy for community e-commerce business going forward?

[Xing Wang, executive]

The recent regulatory guidelines give industry players a clear direction, and the industry puts more focus on improved long-term capabilities, such as product sourcing and SKU management, supply chain and logistics network, and promote a healthier industry growth.

For us at Meituan Select, we have actively addressed the regulatory guidance in reassessing our pricing strategy. We will strengthen our competence by focusing on efficient improvement and better consumer service. By delivering a more superior user experience, we can reinforce our consumer mindshare and brand our [indiscernible] as we optimize SKU selection and control product quality and ensure timely delivery. And we are still very confident about the upside in penetration rate and prospects of community e-commerce in the long run. We believe that the regulatory change will drive the industry towards a healthier and more sustainable growth.

It is a great opportunity for us to tap into the physical e-commerce and the broader consumer retail market. Through operating this business over the past year, we are more convinced of how this business can help residents in lower-tier markets. And we fully recognize the capacity of this business operation.

In order to ensure high-quality consumer experience of community e-commerce, we need to build up multidimensional capabilities and stay patient and invest decisively and run rapidly and continue to iterate.

During the past quarter, we expanded the Meituan Select geographically and deepened their penetration into lower-tier markets. Meanwhile, we have built up our cold chain capability nationwide. By using different procurement strategies for fresh produce and frozen products, our cold chain logistics is able to achieve better product quality and user experience during the summer.

In the traditional off-season of the retail market in the second quarter, we were able to further improve our supply chain capabilities and logistics network. We will continuously improve operational efficiency and iterate the business model and assess our progress on a continuous basis based on our [indiscernible] with long-term-oriented strategy despite short-term volatility.

And overall, there are some fluctuations for Meituan Select due to the recent regulation guidelines and seasonality. But we remain positive on the healthy growth of the community e-commerce business.

Although it may take longer to achieve, our long-term [indiscernible] for the business has not changed. We will follow regulation [indiscernible] to optimize our pricing strategy and build up our long-term capabilities. We will gradually improve Meituan Select's competitiveness and operational efficiency in the long run. So in short, we believe the TAM is huge, but penetration will take time. Thank you.

[Operator]

We have the next question, which is coming from the line of Kenneth Fong from Crédit Suisse.

[K. Fong, analyst]

The in-store hotel & travel segment continued to achieve a high growth this quarter. So what is the expectation for this segment in the longer-term sustainable growth rate as well as profitability? And for Q3, how should we think about the impact from the recurrence of the COVID-19 cases in China?

[Shaohui Chen, executive]

Thank you for raising the question about in-store segment.

We were pleased to see that the GTV, our second segment, achieved a 3-digit year-over-year growth rate in Q2, represent a 2-year CAGR in the high 30s. GTV growth acceleration led to increases in transaction-based revenue, while advertising revenue also achieved a commendable growth, thanks to merchant business recovery.

Recently, cases of the Delta variant occurred in quite a few Chinese cities, and there were renewed issues over certain areas. We noticed that the restaurant daily revenue dropped meaningfully month-by-month in August, and the hotel occupancy ratio also decreased to levels below the same period in 2019. As a result, we estimate a reasonable negative impact to our second segment in August.

Perhaps we -- the measures for pandemic prevention and control by local governments have been effective and also become more routine. Therefore, we believe that the impact on our business may not last for too long, and our in-store, hotel segment will continue to have resilient growth in 2021.

We remain highly confident in this segment's long-term potential. There are 14 million local merchants in China. We only penetrate 2.4 million nonhotel paying merchants, which implies ample room for future growth.

In future, our business development team will continue to expand our online merchant base. We will also leverage our user insights alongside the current consumption trends to bring more service categories online. To attract more young consumers, we will explore more interactive media types, provide them with high-quality supplies as well as trusted and actual recommendations. As a result, we will be able to provide more services and -- that meet consumers' preference and diversified needs by also improving user engagement and frequency.

For our merchants we will build a wider array of transaction-based products and self-service tools to help them accelerate GTV growth and optimize their online operations. We believe that more merchants will choose our diversified advertising product in the future, driving up growth. We will also plan on using more self-owned business development teams versus third-party agencies, which will help improve our penetration rate in lower-tier markets.

For our hotel & travel segment, we have long established advantage in low-star hotels and targeted business at high-star hotel users to improve our segment market share and [ ADR ]. With all these above measures and expectation of steadily growing domestic consumption, we believe that this segment has the potential to maintain a revenue growth of over 25% over the next 5 years with healthy margins. Thank you.

[Operator]

We have the next question coming from the line of Gary Yu from Morgan Stanley.

[Gary Yu, analyst]

Most of my questions has been already addressed, but I have one last one on retail business. Looks like we have increased our investment in Meituan Instashopping and also Meituan Grocery in the past couple of quarters. Is there any recent update on the strategies and also priorities? And how do you assess the kind of long-term profitability of these 2 businesses as well as value to Meituan?

[Shaohui Chen, executive]

Yes, sure. So retailing is [indiscernible] focus, including Meituan Select, Meituan Instashopping and the Meituan Grocery. For Meituan Select, its scenario is more for preorder in a group purchase model, while Meituan Instashopping and Meituan Grocery provide 30-minute delivery services to consumers.

Our platforms continue to convert high-quality food delivery users to use Meituan Instashopping, which drove with high growth further in Q2. By further increasing SKUs and optimizing product structure, we maintained rapid year-over-year growth in order volumes. Through holidays such as May 20 and our 24x7 medicine delivery, we further cultivate consumer mindshare as the go-to platform for on-demand delivery service that brings everything to their doorsteps.

Flowers and the medicine achieved very high growth with GTV for flowers growing by 250% year-over-year and medicine growing by 345% year-over-year in Q2. Over the next few quarters, we will continue to invest in Meituan Instashopping by expanding our product categories and SKUs. We will further strengthen our cooperation with top brands, local supermarkets, convenience stores, flower shops, pharmacies and more local merchants and continue to cultivate consumer mindshare.

[Foreign Language] Meituan Instashopping is a way for us to expand our on-demand delivery consumption scenarios from restaurant food to more direct categories. We not only increase the transaction frequency and app of existing medium- to high-frequency food delivery users on our platform but also improve the efficiency of our delivery network. We believe that adding order volume of Meituan Instashopping, it has potential to achieve over 10 million in the long run, while economies of scale will help us achieve long-term profitability.

Our delivery capacity between Meituan Instashopping and food delivery complement each other and is a clear advantage for us to further increase order density and drive our on-demand delivery network efficiency. We will continue to convert more frequent food delivery users to using Meituan Instashopping.

For Meituan Grocery, with our self-operating front distribution warehouse model, we'll essentially complete our coverage expansion in the 4 Tier 1 cities in the second quarter. Order volume grew close to 350% year-over-year. In terms of the business model, we believe that the online grocery market is large and diverse enough for different models to coexist and meet varying needs for different users in different markets.

Compared to community e-commerce, the front distribution warehouse model focus on meeting the needs of users in higher-tier cities. Meituan Grocery can provide users with on-demand delivery by utilizing our advantage and delivery network while offering a wider range of attractive, high-quality products.

Over the past quarter, we continued to accelerate our operational capability of Meituan Grocery, including: first, adjusted the warehouse capacity for a portion of our warehouse based on user needs and optimize the strategy and product selection, marketing, warehousing and delivery operations; second, further accelerate supply chain capabilities to expand our SKU offering; third, strengthen our promotional capability to continue to capture users' mindshare; fourth, continue to improve operation and delivery capabilities while increase overall efficiency.

Similar to other players in the market, our operating loss of -- on distribution warehouse model is still relatively high, but we believe that with further enhanced order frequency, optimized SKU offering and improved delivery method, our [ STP ] and AOV for Meituan Grocery will continue to increase, and the overall profitability of the business will continue to improve with economies of scale. Thank you.

[Operator]

Thank you. We have no further questions at the moment. I would like to hand the conference back to Scarlett Xu. Please take over.

[Scarlett Xu, executive]

Okay. Thank you, everyone, for joining our call. We're looking forward to speaking with you next quarter. Thank you.

[Xing Wang, executive]

Thank you, everyone.

[Operator]

Thank you. Thank you. That concludes the conference call for today. Thank you all for your participation. You may disconnect now.