Meituan's Margin Squeeze and Strategic Resilience in China's Food Delivery Price War

The food delivery sector in China has become a battleground for market dominance, with Meituan (HK: 3690) bearing the brunt of a brutal price war. Q2 2025 financial results underscore the company's short-term struggles: Core Local Commerce (CLC) operating margins collapsed by 19.4 percentage points to 5.7%, while adjusted net profit fell 10.1% year-on-year. Yet, beneath the surface of these numbers lies a calculated strategy to cement long-term platform dominance through AI-driven efficiency gains and strategic financial discipline.

The Short-Term Pain: A Calculated Sacrifice

Meituan's margin compression is no accident. Competitors like JD.com and Ele.me have injected over RMB10 billion into subsidies, forcing Meituan to match their spending to retain its 60–70% market share. The result? A 60% drop in profit per food delivery order to RMB0.74 and a 75.6% decline in CLC operating profit to RMB3.7 billion. While these figures are alarming, CEO Wang Xing's public stance—“bleeding for the long-term”—reveals a deliberate trade-off. By tolerating short-term losses, Meituan aims to deter rivals and lock in high-frequency users, a critical asset in a sector where customer retention drives network effects.

Investors must contextualize these losses within the broader competitive landscape. The CLC segment still grew revenue by 7.7% to RMB65.3 billion in Q2 2025, demonstrating that Meituan's core business remains resilient despite margin erosion. Meanwhile, its new business segment, though operating at a RMB1.9 billion loss, expanded revenue by 22.8% to RMB26.5 billion, signaling early-stage international traction.

The Long-Term Play: AI as a Competitive Moat

Meituan's response to margin pressure is not just defensive—it's transformative. The company has invested heavily in AI-driven logistics, achieving a 20.96% reduction in delivery times and a 23.77% cut in courier travel distances. These optimizations translate to annual savings of USD 230 million, a figure that compounds as AI models refine further. Unlike rivals, who rely on brute-force subsidies, Meituan is building a sustainable edge through technology.

The implications are profound. AI-powered route optimization and dynamic pricing models create a feedback loop: more data improves AI accuracy, which lowers costs and enhances user experience, further entrenching Meituan's dominance. This moat is difficult to replicate, especially for newer entrants lacking the vast datasets Meituan has accumulated.

Financial Resilience: A Fortress Balance Sheet

Critics may argue that Meituan's RMB100 billion in cash reserves and zero net debt are its only defenses. But liquidity is a strategic tool here. By sustaining its investment in AI and logistics, Meituan can outlast rivals with thinner balance sheets. For context, Ele.me and JD.com's food delivery arms lack the same financial flexibility, making their aggressive subsidies a riskier proposition.

Moreover, Meituan's international expansion—via Keeta in the Middle East and Hong Kong—acts as a long-term hedge. While these operations are currently loss-making, they align with the company's vision to become a global instant commerce leader. Analysts project breakeven for these ventures by 2026, a timeline that rewards patient capital.

Investment Thesis: Balancing Risks and Rewards

For investors, the key question is whether Meituan's short-term pain justifies its long-term potential. The company's margin squeeze is undeniably severe, but it's a strategic investment in market leadership. With AI-driven efficiency gains already materializing and a fortress balance sheet to weather the storm, Meituan is positioned to reclaim profitability once the price war subsides.

Recommendation: Investors with a 3–5 year horizon should consider a cautious overweight in Meituan. The stock's current valuation discounts future efficiency gains and international growth, offering a margin of safety. However, those averse to near-term volatility should wait for clearer signs of margin stabilization or a pullback in competitive spending.

In the end, Meituan's story is one of resilience. By sacrificing today's margins for tomorrow's dominance, the company is rewriting the rules of the food delivery game. For those who recognize the value of AI-driven moats and strategic patience, the long-term rewards could be substantial.