INTERNET: Ele.me Squeezes Merchants with New Fees

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Bottom line: Ele.me’s new fees will raise the ire of restaurant partners on its platform but is unlikely to produce a mass revolt, and reflects growing pressure on the company to find new revenue sources and become profitable.

Restaurants grumble over new fees from Ele.me

Signs of stress are showing up at leading online take-out dining service Ele.me, which is facing howls of protest from its restaurants partners over a major new fee. This kind of mass complaining is relatively common in China’s cyber realm, especially in industries where online companies are losing money and desperately looking for new revenue sources. The take-out dining industry certainly fits that description, as stiff competition from names like Baidu (Nasdaq: BIDU) and Meituan-Dianping forces companies like Ele.me deeply into the red.

This kind of competition is quite typical for China, and was tolerated for the last few years by investors who were happy to continue giving billions of dollars to these companies to fund their operations. But the funding flow has shown recent signs of a sharp slowdown, which is forcing companies to look for ways to lower costs and boost revenue from their actual businesses.

Just last week such pressure drove China’s 2 leading hired car service providers, Didi Chuxing and Uber, to announce a merger of their China operations. (previous post)  I suspect we could see one or two such similar marriages in the online take-out dining sector by the end of this year.

According to the latest headlines, a number of restaurants are complaining of the new “technology fee” that Ele.me, whose backers include Alibaba (NYSE: BABA), recently began imposing on them for selling their food on its site. (Chinese article) Ele.me and its rivals operate online platforms that allow diners to order food from a choice of hundreds of nearby restaurants, and have it delivered to their homes.

The reports say the new fee is actually quite large at 5 percent, and that Ele.me is threatening to remove any restaurants from its system for failure to pay. It doesn’t appear the restaurants are actually getting any new services for the fee. Instead, the merchants are complaining that the fee is just a way for Ele.me to charge them more money to list their food on the site.

Squeezing Merchants

This kind of merchant uprising is relatively frequent in China, and occurs when operators of big online platforms try to squeeze more money out of their merchant partners. Over the last year we’ve seen similar complaints leveled by airlines and hotel operators against online travel sites like Ctrip (Nasdaq: CTRP) and Qunar (Nasdaq: QUNR). A few years ago online merchants also rebelled against Alibaba when it sharply raised its fees.

In most of these cases, the platform operators in their first few years were willing to heavily subsidize their services to gain market share, providing a boon to both consumers and merchants that use the platforms. Of course the real subsidizers in those case were investors, who kept giving funds to these money-losing platform operators with hopes that they would someday become highly profitable.

But lately those investors seem to be running out of patience and are withholding new money and telling these platform operators to work harder to become profitable. That kind of pressure drove Didi to announce its mega-merger with Uber’s China operations last week, and has also driven a number of similar mega mergers and sales of money-losing companies over the last year.

It’s a bit unclear if these merchant complaints will morph into a full uprising, which could be quite disruptive to Ele.me’s platform. The reality is that operating restaurants is a very difficult business due to stiff competition and low margins, and many such owners simply can’t afford to pay the new 5 percent fee that Ele.me is demanding. At the end of the day the new fees will probably force many restaurants to abandon Ele.me. Such fees do look like a good new revenue source from Ele.me’s perspective to stem its operating losses, though I still suspect we will see some consolidation in this ultra-competitive sector soon.

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