Meituan

HKEX:3690

Earnings Call Transcript 2018-Q3

[Operator]

Welcome to the Meituan Dianping Third Quarter 2018 Earnings Results Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Scarlett Yu, Vice President of Capital Markets. Scarlett, please go ahead.

[Scarlett Yu, executive]

Thank you, operator. Good evening and good morning, everyone. Welcome to our 2018 third quarter results 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 the quarter and then, we will 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 results in the future. This presentation is based on our management accounts which has not been audited or reviewed by our auditor.

This presentation also contains some unaudited non-IFRS financial measures and should be considered, in addition to, but 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 our disclosure documents on 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 our first earnings conference call. Meituan Dianping is a young public company, and I want to take this opportunity to thank you all for your attention and interest in our business.

The mission of our company is to help people eat better and live better, and we continue to believe this is a super exciting opportunity and we are happy to bring it to the public capital market.

First, I would like to highlight our performance in the third quarter of this year. So during Q3, we achieved a strong and healthy growth across all of our major business lines. Our total gross transaction volume grew 40% year-over-year to RMB 146 billion.

During China's overall economic transition, we are seeing the service industry becoming more important for the overall economy, driven by urbanization and [ financial ] upgrade and digitization. So in this quarter, we have further strengthened our leadership as the one-stop e-commerce platform for services in China.

By Q3, our annual transacting user increased to 380 million from 290 million in the prior year period. The average number of transaction per transacting user increased to 22.27x from 17.1x in Q3 last year. So we have built a large and loyal consumer base in the service e-commerce market in China.

By Q3, our annual active merchants increased to 5.5 million from 3.8 million. Our platform development is extending from consumer-facing services to cover the broader value chain of the service industry.

The traditional service industry in China is fragmented, underdeveloped and lack of strong brands and infrastructure. Its overall online penetration is still very low and it's apparent that the demand side and supply side are both embracing the digital trend.

In the past, we have seen consumers move from feature phones to smartphones. And now, a similar transition is happening on the merchant side. We invested heavily to provide more broader offerings for our merchants from online content to marketing to order fulfillment to IT and supply chain services.

And the initial result from our merchant side investment is very encouraging. For example, we have become the largest Restaurant Management System provider in China, which help digitize a merchant's operation process to connect to our platform's diversified offerings more effectively.

Our supply chain solution, Kuailv, is also digitizing the fulfillment process of restaurants, making the whole process more convenient and cost-effective. And today, over 10% of our active merchant base chooses to use at least one of our merchant side services. And we are confident that there is much room to grow. And the digitalization on the supply side will provide a better user experience and complete cross-group digital economy.

In this quarter, we fully solidified our leadership in food delivery and other core service categories. And our average daily transactions of food delivery increased 48% year-over-year to 19.4 million from 13.1 million in Q3 last year. So we continue to leverage our platform to help other merchants such as hotels and travel attractions. And our quarterly domestic hotel room nights increased to 76.1 million from 56.4 million in Q3 last year.

You may have noticed that we announced our new organizational structure on October 30. So the purpose of this reorg is to better serve our overall strategy, which is summarized as to give us Food+Platform.

So under this Food+Platform strategy, we provide different services covering different steps in the food value chain such as the food delivery, restaurant review and promotion and Restaurant Management Systems and B2B supply chain solution like Kuailv. And through our investment into these different services, we are able to build a similar capability, and that can extend to cover other nonfood categories at the platform. And for example, our in-store business group is built on our restaurant review and promotion service and now covers many other location-based merchants such as beauty spas and also a lot of them including hotels.

And our to-home business group is built in our food delivery service and that's extending to cover other nonfood delivery categories. For example, our Ella Supermarket business will continue to explore opportunities in the fresh grocery retail market. And our Kuailv business remains committed to providing high-quality B2B supply chain solution to restaurants.

And on top of that, our newly established user platform will focus on enhancing the one-stop consumer experience across multiple products and service on our platform.

And last but not least, our newly established LBS platform, which means location-based service platform, will centralize technical resources for location-based infrastructure. So this new organizational structure will allow us to enjoy better synergy across different business capability and provide a better operational leverage and with a focus on our core competence and internal capability.

And so after the IPO, I have to spend more time on building our organizational capability. So I understand most investors may want to hear more of our business strategies. I believe it's equally important to focus on your fundamentals -- the fundamentals of your organizational capability. Because right now, we are facing such a huge opportunity, we have such a good position, so we have no lack of opportunity -- we have no lack of business opportunity. What really matters is that we can use our organization and use our capability to identify the right things and to grow the team, upgrade the team and make sure we can capture the opportunity and do everything better than our competitors. So that's not related to any single business, right, a very important capability across the whole organization.

And it will take a lot of time and a lot of effort to strengthen the fundamentals. I think that's the way to be the long-term viable company. So in the past, all companies, all Internet companies in China can grow very fast. That's because of the macro. Now I think it will become a real test for companies that can -- that manage better and manage very poor. So in the past, it doesn't matter that much. But I think in the future, it will matter more. So that's why I spend more time on building the fundamental organizational capability.

And this is not the first time we make organizational structural change and it will not be the last time. As a global pioneer for service e-commerce, we hold a long-term view on our business, and are always willing to upgrade ourselves to reflect our latest understanding on customers' needs and our development requirement. And China is in a transitional period where consumer want better services, the merchants want to become more efficient and they want to make more money. And technology is going to play a very critical role during this transition.

So in the past decade, we have moved restaurants online and generated a lot of orders for them through our delivery. But we know this is just the beginning and the entire value chain of local services will be digitized eventually. So the demand side has been more or less been digitized, now everyone has a smartphone and they are always connected through mobile Internet, and we believe the supply-side is also going to be digitized. And the closer we work with them, with those local service merchants, the more opportunity we will find to invest in.

And we feel very lucky to be in our position today in that we are building a platform to transform how Chinese people eat and how local merchants operate their daily business. We will make sure to continue our investment toward this direction, we are going to build a lot on the supply side. Only when the supply side is also digitized, we can help build the roof of the whole digital economy.

And it's not easy to think long term, particularly when you become a public company. We want to maintain this long-term thinking capability in our business strategy, and we will stick to the same philosophy for our capital market strategy.

So under current macroenvironment, there could be a short-term uncertainty and volatility we need to face. I think this philosophy allows us to always look beyond the short-term obstacles and make the right decision for the long term. So we feel that we are following our mission, and we are going to continue using technology to help the people eat better and live better.

And with that, I will turn the call over to Shaohui. Thank you.

[Shaohui Chen, executive]

Thank you, Xing. Hello, everyone. Now I will go through the financial performance in Q3.

In this quarter, Meituan Dianping achieved strong top line growth. Our revenue increased by 97.2% to RMB 19 billion. The driver is GTV and total monetization rate.

From GTV perspective, the growth comes from increasing total consumer base and also the stickiness of existing consumers. Particularly, our largest category, food delivery, is still growing at a fast pace and also new initiatives also increasing their contribution.

Total monetization rate increased to 13.1%. The increase was driven by steady growth of total monetization rate across all major business segments as well as the mix change of different segments.

Our total gross profit increased to RMB 4.6 billion. We continue to make gross margin improvements in our core categories, including food delivery and the in-store, hotel & travel. This is because we have achieved better efficiency and better economies of scale. In addition, selling and marketing expenses as a percentage of total revenue decreased to 24.2% from 32.9% in the same period of 2017, thanks to our stronger brand and improved stickiness of our consumers.

While our investments in new initiative tempered our overall profitability improvement, our adjusted EBITDA and adjusted net loss narrowed on a quarter-over-quarter basis to RMB 1.2 billion and RMB 2.1 billion, respectively. In the third quarter 2018, we continued to improve the profitability of our 2 core business segments and also loss of some of our new initiatives such as car-hailing and Mobike narrowed on a quarter-over-quarter basis.

Now I would like to turn to the segment reporting. Our first segment, food delivery. Food delivery GTV increased by 54.4% to RMB 80 billion. We remain excited for the remarkable growth for food delivery at large scale. Even though we have been investing heavily in the last 5 years to acquire food deliver consumers and merchants, we still see more potential to increase our penetration in both the top-tier and the lower-tier cities. For example, even Beijing and Shanghai as the most mature cities, still achieved total GTV growth rate of over 50% in Q3.

We believe food delivery has been and will continue to play an important role in China's overall food consumption growth. The business is shaping people's lifestyle. Our peak hours now have extended from lunch and dinner to breakfast, afternoon teas, midnight snacks and weekend gatherings. Our top 10% food delivery consumers made 42 orders on average in Q3. The long-term outlook for this sector's growth is clear and promising.

Monetization rate for food delivery increased to 14% from 11.7% in Q3 last year and from 13.1% in the second quarter of this year. This is driven by both the increase in delivery charges in our delivery model and the increase in platform charges in our marketplace model.

Compared to the overseas peers, the monetization rate of our food delivery business is still low. This is in line with our strategy that we are focusing on growing the volume and encouraging more investment by the merchants.

As Xing mentioned, consumers have been using food delivery more and more often and they require higher quality food and service. They want food to be healthier, more diversified and cheaper. They want the food production process to be more transparent. This all requires the supply side to invest further to meet consumers' elevated demands. And we as a platform will make sure to invest and provide better infrastructures.

As a result, our food delivery revenue increased by 84.8% year-over-year to RMB 11.2 billion. Our gross profit increased significantly by 287% to RMB 1.9 billion, and gross margin further expanded to 16.6% from 7.9%, which is primarily driven by better efficiency of our delivery riders and our dispatching systems.

Despite the steady increase in profitability, also the potential in profitability, we still carefully access our investment strategy on a timely basis to make sure we can still capture the growth of orders and continue to improve the stickiness of consumers on our platform.

On second segment, in-store, hotel & travel, revenue in each segment increased by 46.8% year-over-year to RMB 4.4 billion. And gross profit increased to RMB 4 billion from RMB 2.7 billion. Gross margin increased to 90.6%. The number of annual active merchants and average revenue per active merchant both increased significantly.

This segment's growth demonstrate our platform's capability to provide an effective online marketing and sales channel for diversified location-based merchants. We convert high-frequency traffic from foot to lower-frequency but higher-margin long-tail categories such as parenting, weddings, beauty, karaoke, et cetera.

Depending on the nature of the merchants' needs, revenue can generate directly from advertisement fee or transaction-based commission. Our GTV grew by 13.9% year-over-year, monetization rate increased to 9% from 7% attributable to the increasing contribution from online marketing revenue. For example, revenue from our beauty category more than doubled. We also experimented channel-specific programs for some categories such as parenting and children's category.

In Shanghai, we piloted a membership card that give users free or discounted access to a network of the most popular children play facilities in the city. It is also our second year of hosting Kid's Wonderful Day event where we brought together over 8,000 families and hundreds of merchants in Shanghai. We plan to roll out similar events to more cities in the coming months.

On hotel business, our hotel booking also progressed very well. Domestic rooms per nights booked increased by 34.8% year-over-year to 76.1 million. We established cooperation with more than 50 high-end hotel groups during 2018 and have worked with 90 high-end hotel rooms in total. We are very confident about the monetization potential of this segment.

Let's move to the third segment, new initiatives and others. GTV for new initiatives and others grew by 83% to RMB 16.4 billion, and revenue increased significantly by 470% to RMB 3.5 billion. New initiatives and others business recorded a gross loss of RMB 1.3 billion. Gross margin decreased to a negative 37.4%. This was primarily due to the increased investment in some new service offerings and also due to the change of business mix in this segment.

As we mentioned before, for new initiatives and others, we focus on exploring and investing to capture future growth opportunity and to strengthen our leadership in core categories. The change in the mix could be fast, and from this quarter we began to focusing more on growing the food-related initiatives. We have taken a very disciplined approach under investments into these new initiatives, and we'll continue to focus on building long-term competitive advantage by allocating our resources carefully.

Regarding new initiatives to serve consumers, to leverage our efficient customer base and on-demand delivery network, we are extending food delivery service to cover nonfood categories for local retailers. Currently, nonfood delivery orders contribute about 5% of our total delivery orders, and is increasing rapidly. We continue to explore and update the business model for nonfood delivery and to further improve the efficiency of our delivery network.

Our new initiatives to serve merchants. We have invested heavily on Restaurant Management System and the food supply chain solutions. These 2 businesses progressed well in the third quarter. Take the food supply chain solution as an example. Our total number of annual active merchants increased to more than 450,000 at the end of Q3 from less than 100,000 6 months ago.

Our new initiative in transportation is the result of the efforts to streamline our Mobike and car-hailing businesses. Total gross loss of these 2 business narrowed significantly in the third quarter of 2018 on a quarter-over-quarter basis.

Now moving to our cash position. At the end of Q3, total balance of cash and cash equivalents, restricted cash and short-term investments was RMB 64.2 billion. For the third quarter, our cash used in operating activities amounted RMB 3.5 billion, mainly consists of the negative adjusted EBITDA and changes in working capital.

To summarize, we were able to stick to our mission and execute our strategy well in this quarter. Our core business, food delivery and the in-store, hotel & travel, achieved healthy financial improvement and further strengthened our leadership. We are making good progress in our new initiative, and we'll continue to make investments into food-related new initiatives.

This concludes our prepared remarks. Operator, please open up the call for questions.

[Operator]

[Operator Instructions] The first question comes from the line of Eddie Leung with Bank of America Merrill Lynch.

[Eddie Leung, analyst]

It has been a long journey for you guys, so many congratulations. My 2 questions are related to your food delivery business. Could you comment on the impact you have seen from the macro uncertainty as well as anything from the competitor after the merger? Because we have seen a bit of a deceleration in the number of food delivery transactions, so just wondering whether the macro environment as well as the competitive landscape have anything to do with it? So if you have any color to share, that will be helpful.

[Xing Wang, executive]

Thank you, Eddie. So as an e-commerce platform, our business are not immune to the macro slowdowns because we are already quite sizable. For example, some consumer may become more price sensitive or may slowly become more cautious about discretional spending such as leisure travel or lifestyle services. And also in addition, we believe that given we focus on further related high-frequency and relatively low sticky side services, we are less impacted by short-term macro slowdowns. So consumer staples such as food consumption generally remain resilient against macro headwinds. And I believe that while the macro can be good or not that good, no matter what happens, people still need to eat. And we are here to help the people eat better and we are going to provide the most convenient way for people to eat. So they still need that. And so that's why we are still very optimistic about the long-term economic outlook. And also we are very optimistic about the business opportunity despite the short-term macro headwinds. So I think it's all about short-term and long-term. So -- but China will continue its transition to a consumption-driven and service-driven development model because now I suppose it is not that -- well, growing that quickly, people are going to spend more. And also, the middle-class is expected to double to maybe 600 million in the next 5 years. So with the higher income and busier lifestyle, this urbanized consumer will increase their spending on food delivery for convenience. And also, I think they are going to explore more lifestyle services to improve the quality of their daily life. When they move to a city, when they make more money, they will want to eat better and live better. And also, at the end of the day, food consumption is the biggest category of consumer spending on services. And we start a continuous structural shift from home cooking to food delivery because young people -- most young people don't cook anymore, but they still need to eat. And at this stage, many of the young people don't even have a functional kitchen, but they still need to eat. So that's why they are going to order more and more food deliveries. And as the largest one-stop platform for local services and also the largest food delivery service provider in China, I think we are well positioned to capture this growth opportunity. And on the demand side, although the average order value growth may be impacted by macro slowdown and as some consumers become more price-sensitive and -- but we still continue to -- we will continue to enhance purchase frequency and expand our use cases to drive the growth. And on the supply side, we will continue to help merchants digitize their operations to further strengthen our leadership relationship with them and help them mitigate the macro impact. And for example, our Restaurant Management System, the RMS, and our food supply chain solution, Kuailv, they help merchants reduce operation and procurement costs, improve their operating efficiency and profitability. So the more quality supply on our platform, the more additional demand we are going to create on our platform. So in short, I think we are not totally immune to the macro slowdown. We remain positive -- optimistic about the long-term outlook.

[Shaohui Chen, executive]

Okay. I will take the second question about competition. I think this is also a point that many investors are interested about. So first, I would like to explain how we look at competition in our industry. So food is a big market. So as Xing has said, we don't believe this is a one-player market. Its very nature is that such a big market, there will always be competition and with -- competition has never been new to us. So in the past 8, 10 years, Meituan Dianping has been facing very fierce competition and we have proven ourselves that we are able to compete effectively. We believe capable competitors in this market actually help us to grow faster and to make us stronger. We also think that this is a big market and still in the very early stage, so multiple players working together in this market actually can track the market growth faster. It was actually part of the reason that China food delivery market has been able to grow much better and much faster than any other market. But at the same time, we are very confident and we are -- have very clear strategy in terms of how we will respond to competition. We will stick to our overall strategy to think long-term and build our competence that can continue to strengthen our leadership. First, we have built a much stronger brand in the service e-commerce market in China. We have very clear market share for most consumers when they are looking for food delivery or restaurant or other lifestyle services. We think this is very important in current market because consumers are using less and less apps and a one-stop solution for local services has better stickiness. Also, we believe we have the best efficiency in the market, and we will continue to invest into the technology and our overall system to continue to strengthen our efficiency, including our dispatching system, including our matching system for consumers and merchants. We have also been able to build a very strong online -- off-line capability. Different from most traditional Internet companies, we not only have a very heavy online operating, but also very heavy off-line operating. We manage it -- or we manage a local sales force of over 30,000 people across the country and they have been very effective in working closely with the local merchants to help them doing all kinds of business with us. And we will continue to invest in that and continue to increase the productivity of our sales force. And also it's important that we stick to our food platform strategy in that we have been the leader in all kinds of food-related services, provide the most comprehensive offerings to restaurants, and at the same time, we are able to, using our platform strategy, cover multiple categories to increasing the lifetime value of our consumers and also to increasing our overall platform synergy. So we have been -- feel quite comfortable in terms of continuing to compete effectively in this market.

[Operator]

The next question comes from the line of Grace Chen with Morgan Stanley.

[Grace Chen, analyst]

My question is about the advertisings in in-store business. We see very strong growth this quarter, but at the same time, we're also seeing other Internet companies suffering from merchants tightening advertising budgets. Can you let us know why you guys are doing much better? And are you observing similar challenges like other Internet companies from macro headwinds in near future?

[Xing Wang, executive]

First, let me clarify your question. Your question is regarding our in-store business capability?

[Grace Chen, analyst]

Yes, especially the -- yes, correct. And also within that is the advertising contribution.

[Xing Wang, executive]

Okay. So as we mentioned that we actually feel we have some very clear leadership in our installed business in that both Meituan and Dianping have been the strongest brands in these markets, both from consumers' perspective and from merchant perspective. So essentially, today, merchants are using Meituan and Dianping as [ the ideal ] online marketing and promotion channel for their local stock. That's why we mentioned that we have seen very solid results on our advertising business with our marketing revenue, growing about 85% year-over-year. So we still think this business is in the early stage because we still see a fast-growing merchant base as well as fast increasing value in these merchants. So underneath the overall economic condition, we agree that no industry will be immune to this situation. And merchants could be more cautious in their advertisement spending. So we have been also very carefully and monitoring the merchant behavior on our platform. However, on the other hand, we noticed that when there was a decline in their overall economy, there could be more difficult in off-line traffic for these local stocks. So Meituan Dianping actually provides a new alternative for their marketing needs. So because we have been able to provide more targeted, effective tools for this local stock, and these tools have been proven to generate better ROI because of technology support. So we think that under this economic condition, we actually can benefit from merchants shifting some of their budgets from offline to online. And as a leading platform in this space, we think we will be able to capture those opportunities.

[Operator]

The next question comes from the line of Ronald Keung with Goldman Sachs.

[Ronald Keung, analyst]

I have 2 questions. The first question is on the monetization rate of our food delivery business, which we see have increased further to 14% in the third quarter. So when we look at the [indiscernible] take rates, we do see the company better there providing more support to the restaurants and has mentioned about services, including financing, supply chain and the rest. Just want to hear your thoughts on just the monetization rate outlook for our food delivery business mostly for the fourth quarter and next year? How do we see that trend? Are we giving more support to restaurants? And any other further monetization potentials from advertising to other [ 2B ] initiatives that could apply here as well? And then my second question is on the hotels. That [indiscernible] has recently commented on stepping up sales and marketing and they commented a moderation in growth. And so can you share with as your strategy on hotels? Have you seen any changes in competitive landscape lately? And whether we will place -- continue to place share gains as a priority or also increasingly focus on profitability for this segment?

[Xing Wang, executive]

Thanks, Ronald. So the first question's on food delivery, and the second question on hotel. So for food delivery, as you can see from our Q3 results, we have been able to both increase our volume in line with our expectation but at the same time, we are able to improve our unit economics under a competitive environment. As we mentioned, the other players in the market have been quite aggressive from this summer to invest in this space, trying to catch up without -- with us. We have been able to stick to our own strategy and need to improve our financial results on the food delivery. Our current take rate is still much lower in -- with peers, and we believe there is still a big room to grow in the long term. However, as we mentioned, for the overall economic environment, we will focus more on working closely with the merchants to encourage the merchants' investments and shifting their volume online rather than monetize as much as possible. We are also carefully monitoring the overall and competitive environment to make sure we still achieve both the most -- the best efficiency and also the best ROI in terms of our investments. So we are not focused on the short-term profitability, even though we have been proven that we are able to do so to make it a continuing improvement in our unit economics. We would rather focus on growth and improve the overall user and merchant experience and to continue to strengthen our leadership in this market. For your question regarding hotels, again, all kinds of services and consumption activity will be impacted by the macro environment, including hotels as hotels is related to other lifestyle and travel activities. However, we are still very confident on the long-term perspective of their overall consumers' spending power and the hotel business as a whole. In terms of our own strategy, we have been able to build a very differentiated way of growing our hotel volume from traditional OTA players. We leverage our high frequency food services traffic and the cross-sale to hotel booking services, which significantly lower our user acquisition costs and operating costs; and we will continue to do so, given we have been able to continually increase our high-frequency traffic and also continue to increase our conversion rate from high-frequency to low-frequency categories. And also, when the macroeconomy slows down, we are seeing that hotels actually are more eager to seek additional resources to attract traffic, particularly in working with platforms like us because we are able to bring new business, bring new customers that they are not able to get access to from traditional OTA platforms. And we are also benefit from that we provide comprehensive offering to hotels, not just the room booking, we are working closely with their restaurants business, with their [ chain ] and wedding-related services. So in this economic situation, we think we have been a more preferred partner to hotels.

[Operator]

The next question comes from the line of Alex Yao with JPMorgan.

[Alex Yao, analyst]

Congratulations on the first quarter after the IPO. It's been a surprisingly breathtaking fun journey in the past 10 years and I wish it's going to be another breathtakingly fun journey for the next 10 years. I have 2 questions. The number one is on food delivery. On the back of the current macro and the competition environment, how do you think the unit economics -- what's the strategy and how should we think about the unit economics for food delivery over the next couple of years? And are you seeing any risk to achieve your path to profitability for food delivery business? Secondly, on the new initiative business, given the macro condition and the competition in the food delivery industry, are you guys planning to invest in new areas as aggressively as you planned or are you reducing the investment to balance the financial outlook? What is your overall investment strategy for this new initiative segment?

[Xing Wang, executive]

Thank you, Alex. I'm glad you mentioned about the 10-year time span, because if we're talking about things long term, I think 10 years is the starting point to think about the question you mentioned and that's exactly the direction we are building for, so even though we are talking a lot about short-term uncertainty in the environment. But for your questions, on food delivery, first, we're still very confident that this is going to be a great business model in that we have been able to build services that connect consumers and merchants and participate in building lots of infrastructure, particularly the last-mile delivery infrastructure, which is very valuable and really solve the problems for consumers and merchants. So we have no concerns on continue to increasing the monetization rate to realize the value we create. And also, this is a business that can enjoy clear economy of scale. So when we have higher order density, we will have better efficiency. We will lower the order delivery cost, that's how we can improve the gross margin in the last several quarters. So in the longest period of time, it's very clear that for the delivery business, not only it's going to be one of the most -- one of the biggest order-generating categories across all service categories, also it's going to be a very profitable business from unit perspective. Having said that, as I mentioned earlier that we still think this is just getting started. Consumers have been educated and lots of infrastructure investments still required for both the platform and the merchant side. That's why both Shaohui and myself inspect a lot of the digitization of the supply side. So we would rather be focusing in the short-term on the monetization on the [ UE ], and we will look more for investing into infrastructure to solve the off-net in term of their demands that cannot be satisfied today. So this is our view on the food delivery. On new initiative, first, I want to emphasize that although we have been investing a lot onto new initiatives, we have always made sure that our core business always get the best attention and have sufficient resources to establish long-term market leadership under macro slowdown and intense competition. And we also take a more longer-term view on our investment into these new initiatives. We will be more selective and be more cautious and allocate our resources on to our new initiatives under this macro slowdown, particularly we will focus more -- we will prioritize resources more on the food-related services such as the Restaurant Management System and the food supply chain solution because we believe those not only have great business opportunity themselves due to a poor infrastructure traditionally, but also has great synergy with our core business and will help strengthen our leadership in the food delivery, restaurant-related services and also help our -- continue to build our platform.

[Operator]

The next question comes from the line of Binnie Wong with HSBC.

[Wai Yan Wong, analyst]

Congrats on your IPO, too, and kick off by reporting a solid quarter. My first question is on the 2B services. So if we listen carefully to your opening remarks, there's increasing focus on digitalization on the supply chain. So can we -- can management share more color on Meituan's differentiation in terms of our [ 2B ] services, say, in terms of the Restaurant Management System, payment and your micro loan to that of your peer? Any progress update? And how should we look at the penetration and also the addressable market across your different segments of the business in terms of the [ 2B ] supply -- [ 2B ] services side? And lastly is on how should we think about the incremental investments that Meituan need to put up with in terms of the [ 2B ] services? And then just a follow-up on the hotel and travel business. Because we understand, it was merged by the in-store business group in the recent update, as you mentioned. So how should we understand the rationale of the strategic realignment?

[Xing Wang, executive]

Thank you, Binnie. So our advantage on the [ 2B ] services, particularly on the local merchant side, so I think first, it's important to understand that we have been working with all these local merchants for over a decade. So starting from Dianping's review and then Meituan's deal and coupon-driven transactions, we have been serving our local merchants for a long period of time. So we have still a profound knowledge and insight and data into their local merchants, particularly in the restaurant industry. I think it is a know-how, a asset that no other new player are able to accumulate in a short period of time. And it is very important because for [ 2B ] business you need to understand your potential customers very well, their operating process, their pain points in order to design the right products and service to them. And second, we have been able to build a very strong online -- off-line capability for these restaurants. On online operating, we have -- able to build their largest platform that can help these merchants connecting to their most valuable local consumers. This is important because all these local merchants want to do, work with us, because they want more business and we can help them get access towards consumers. And on the off-line side, we have also built the largest, strongest on the ground, business development force which is quite unique compared to other companies. We are continuing to invest heavily onto these sales force, not only quantity but more in terms of upgrade their skill sets and to have this sales force able to sell different products. This is also a very important and differentiated factor. Finally, we have the most integrated solution, most comprehensive offering to those local restaurants. So we are working with them on online content, online marketing and promotion. And extending to transaction and delivery service and now we are launching their Restaurant Management System and food supply chain. As a result, these efforts and the capability, what I can share is that we have been making good progress in the merchant side services. As I mentioned, our food supply chain solution has been able to achieve over 450,000 annual active merchants with our customers, and our Restaurant Management System has been also able to serve over 420,000 annual active merchants. So this means that our penetration rate, our merchant base, is more than 10% for our merchants and services. But I think this number still has room to grow and that's exactly where we are, invest in our resources for the new initiatives. So your question on the restructuring of combining hotel travel and in-store. Actually, as you can see in our actual prospectus, in our quarterly report, we have already been combining these 2 business together because we believe they are very similar in their business model and combining together actually provides a better view for investors to understand why we as a platform is able to monetize our high frequency traffic, convert our food delivery traffic to this relative lower frequency but higher-margin long-term categories. So putting them together I think is a very natural decision from our understanding of this business. And also, putting it into -- under the same business group, we are enabled more cross-selling capability because the team will be able to working more closely and there's some capability that could be reused -- extend to cover the whole business group. I think that's also effectively why we can differentiate us from traditional OTAs. I think most people still underestimate the value of our in-store, hotel and travel business group and people may be more familiar with hotels because its business model is easier to be compared with more public [ competitor ] companies and in-store business is a relatively new concept. But to us, they are all similar in that we are providing an online platform to connect the local consumers and local merchants on a very effective, intelligent target system. So we are very [ happy ] and also very confident on the potential of this in-store and hotel travel group.

[Operator]

The next question comes from the line of Ella Ji with China Renaissance Securities.

[Diying Ji, analyst]

My questions are relating to your new initiative. So within that, first of all, could you give us the update or perspective for the nonfood delivery? It has definitely achieved a good progress this quarter. What is management's long-term expectation for this business line? And then my second question is, could you give us an update on the car-hailing and the Mobike business? And is there any progress in terms of reducing the loss for these 2 business lines?

[Shaohui Chen, executive]

For nonfood delivery, in theory we believe we have had potential to further utilize our delivery network and improve the efficiency and order density. Right now, it's still very small, contributes about 5% of total delivery orders. And the current business model still needs to further refine as the unit economics for the nonfood delivery is lagging behind the food delivery. So we think because nonfood delivery involves more complicated SKUs and more complex systems in the local retailers, we are still in the process of refining business model. And we will be very actively and explore the best way in increasing their penetration rate. At current stage, it's still at the early stage. On the car-hailing and Mobike business, as I mentioned in the financial section that we have been able to streamline the operations. So our total loss from these 2 business is able to narrow on a quarter-over-quarter basis. Potentially on car-hailing, we are still only test on 2 cities to refine the business model. We currently have no plans to further extend to other cities. And for Mobike, we still feel this business has improved its operational efficiency. And the overall market in the past few years is not very well operated. So we are still in the process of integrating the Mobike business with our platform. Current integration operation improvement is on track. We plan to further reduce the total fleet number in the street as we think there is extensive supply in the market. And to continue to seek for synergy across Mobike and our main platform. Okay.

[Operator]

Mr. Ji, would you like to add something else?

[Diying Ji, analyst]

No. Thank you. That's my question. Thank you, management.

[Operator]

The next question comes from the line of Jerry Liu with UBS.

[Yuan Liu, analyst]

My first question is on memberships. Xing, you've said in the past that memberships could be a good business model for Meituan. So I just wanted to hear a bit more about when and what type of membership we could look at, especially as our competitor is doing something along these lines. And if we do this, could we increase the frequency that the users spend among our platforms? And then secondarily just a follow-up from some of the earlier questions, I'm wondering what does the recent food delivery subsidy trends look like? And I'm thinking both just on the platform side between the 2 major platforms but also on the restaurant side because restaurant subsidies can be a very good driver of additional orders.

[Xing Wang, executive]

Thank you, Jerry. And so yes, of course, membership is very important project and that's for the long-term. So we are in no hurry to rush out our projects that's not [ viable to us ]. So I think the most important thing is to realize the importance and to allocate the most valuable resources to this. So the most valuable resource is the management attention. So after the recent reorg, now we have a user platform, this group. So we have put Meituan app and Dianping app together. And also now we assigned a very great workforce [indiscernible] indeed equivalent to be in charge of the user group. So the team will first integrate the -- to Meituan and Dianping app and other apps. And on top of that, we are going to design our membership program. And I think a good membership program should involve both the demand side and the supply side. Now the demand side has mostly become online digitized, we need to bring supply-side online. Only when we can do that, we can have that close loop and we can make the membership really work. Otherwise it will be -- it has that risk to become another way to just subsidize. So I think we are still very focused of this. We are in no hurry to rush out a half-baked project. So that's what we are thinking on membership. And also because we have Mobike, we have our self-operating, high-frequency service. So I think we are going to have a very good pillar for -- pillar service for the whole membership program. So as we mentioned, we are still integrating the Mobike and we are still working on the fundamentals of that. So that's for the long term. Thank you.

[Shaohui Chen, executive]

I will take the question about subsidy. We have observed that the other player in the market has maintained a much higher subsidy level on the food delivery, starting from this summer, about 3x higher than ours. At the same time, the significant investment mainly in the small portion of the overall consumer behavior, particularly those price-sensitive consumer group which we are not very concerned about because we have been focused more on the quality growth rather than just using investment subsidy to grow the volume. We think this market already into a stage that fewer subsidy is not the most effective way to build your competitive advantages. So we have been very careful in evaluating the competitive environment and also invest when we see there is value, when the ROI can achieve the -- meet our requirements. So we are open-minded to invest only when we see the invest can generate high-quality consumers groups or high-quality orders on our platform. So we have been able to see that our market share continuously in the very clear leading position, given when other player is subsidizing heavily. And at the same time we are able to continue to improve our overall unit economics.

[Operator]

Ladies and gentlemen, this is all the time we have for today's call. I'd like to turn the call back over to the company for closing remarks.

[Scarlett Yu, executive]

Thank you, operator. We are now closing the call. So if you would like to see our press release and other financial information, please visit the IR section of our website. A replay of the webcast will be available shortly. Thank you, everyone, and we wish you a happy Thanksgiving. Thank you.

[Shaohui Chen, executive]

Thank you, everyone.

[Xing Wang, executive]

Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.