New regulation in China to hit food delivery giants’ profit model

The number of people ordering food online in China doubled between 2016 and 2020. Thanks to generous subsidies, the country's food delivery contender for customers and businesses helped to fuel the boom. The two companies that dominated the market were raising fees on merchants. A new regulatory change is going to affect their profit model.

On Friday, a group of Chinese authorities announced that food delivery platforms should further reduce the service fees charged to restaurants in order to lower the operating costs for food and beverage businesses. The news sent the stock down more than 15% on Friday. The company that operates Ele.me saw its shares slide 4%.

China's National Development and Reform Commission directed the new rule to help struggling service industries. In the three months ended in September, the commission contributed as much as 60 percent to the revenues. Food delivery remains the firm's largest revenue driver, but it also charges commission from hotels and other merchants. e-commerce is still the giant's main revenue engine despite the fact that food delivery has been one of its main businesses.

China's food delivery platforms have had to contend with other changes that could erode their profitability. The high-stress environment that puts China's millions of food delivery workers in danger was brought to light by a viral article from 2020. Riders are often running the light to complete assignments because efficiency-optimizing algorithms don't fully factor in human capacity and road incidents.

Chinese authorities have ordered food delivery platforms to improve the safety of their workers. Drivers won't need to check their phones while on their scooters if they have connected helmets that come with voice command functions. Delivery time limits for riders have been relaxed by the platforms. How to balance workers' well-being and business profitability is a challenge for Ele.me.

It is working to reduce its reliance on manual labor. A fleet of food delivery drones have been running small-scale trials in several Chinese cities. Regulations for low-altitude drones are still being worked on in China, and the flyer is in its early stages. The economic viability of drone-enabled food delivery is not certain. One way for labor-intensive, on-demand services providers to test out a safer, more cost-saving future is through automation.

Viral article puts the brakes on China’s food delivery frenzy