Key Takeaways:

• JD.com has signaled it’s preparing to enter China’s massive takeout dining market, most likely using its Dada Nexus local delivery service as a foundation
• The initiative is likely to do well over the longer term by targeting large chains and using existing infrastructure, but could weigh on JD.com’s profits over the shorter term

By Doug Young

China’s duopoly Ele.me and Meituan (3690.HK) looks set to get a major new competitor, as e-commerce giant JD.com (NASDAQ: JD) looks for a place at the country’s massive but highly competitive takeout dining table.

If the privatization succeeds, which seems almost guaranteed, since JD.com currently controls 63% of Dada Nexus, it’s quite possible JD.com could re-list Dada in Hong Kong to raise fresh funds to finance this new takeout delivery initiative. Like many offshore-listed Chinese companies, JD.com is showing a growing preference for Hong Kong, rather than the U.S., for listings of its various units as a hedge against growing U.S.-China tensions.

The company made its own second listing in Hong Kong in 2020, complementing its original U.S. listing dating back to 2014. It also listed both its JD Logistics (2618.HK) and JD Health units (6618.HK) in Hong Kong in 2021.

That brings us to the present, where Meituan and Ele.me currently dominate the market that was worth an estimated $51.5 billion in 2023, according to one online report. Ele.me said it had 750 million users in 2023, and partnerships with 4 million restaurants, according to the report. Meituan, meanwhile, had 670 million users and worked with 6.9 million restaurants.

Alibaba’s latest quarterly report shows that revenue from its local services group, which includes Ele.me, rose 14% year-on-year to 17.7 billion yuan ($2.43 billion) in the three months to last September. The group reported a loss of 391 million yuan on an earnings before interest, taxes and amortization (EBITA) basis, though that was a big improvement over its 2.56 billion yuan EBITA loss a year earlier.  

Meantime, Meituan reported its revenue from delivery services, which includes takeout dining, grew by a similar 13% in last year’s second quarter to 23 billion yuan from 20.4 billion yuan a year earlier. Here, however, we should also note the second quarter growth rate represented a sharp slowdown from the 24.6% growth the company logged in the first quarter.

Dada infrastructure

Next, we’ll look at how JD.com is likely to roll out and expand its takeout dining business as it vies for a piece of the pie. Analysts pointed out that JD.com’s call for “high quality dine-in restaurants” shows it may want to focus on the higher-end of the business and leave the many smaller eateries that compete mostly on price for Ele.me and Meituan.

Such an approach seems smart, at least to start, as the big national chains and higher-end restaurants have better quality control and management in general, which should make them better partners for JD.com. One report notes that JD.com is already working directly with several big national chains, including locally owned Champion Pizza and Yuanji Dumpling, as well as the China operation for Burger King.

Investors weren’t particularly impressed by news of JD.com’s intent to challenge Ele.me and Dianping, perhaps worried by the big losses the company will incur from the move initially. JD.com’s U.S.-listed shares fell 6.1% over the three trading days after the reports, though they’re still up 52% over the last six months, much of that from a major rally since mid-September.

Even after that rally, JD.com’s stock currently trades at a price-to-earnings (P/E) ratio of just 13. That’s well behind the 25 for Alibaba, and the even bigger 45 for Meituan, though it’s about the same as the 12 for PDD (NASDAQ: PDD), which has come under pressure lately due to scrutiny of its popular low-cost Temu international e-commerce site.

At the end of the day, JD.com’s takeout dining move looks like a smart, targeted foray that has good chances of success over the longer term by focusing on big chains and using the company’s existing infrastructure. But the new initiative will also be a money pit over the next few years, which could become a significant damper on JD.com’s profits.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.