Meituan's Strategic Price War and Profit Margin Erosion: A Battle for Long-Term Resilience

In the cutthroat world of China's on-demand services, Meituan (3690.HK) has found itself in a high-stakes game of chess against Alibaba and JD.com. The company's Q2 2025 financial results—a 97% year-over-year drop in net profit—highlight the brutal toll of a price war that has eroded margins and rattled investor confidence. Yet, beneath the surface of these losses lies a complex story of strategic resilience, technological innovation, and a race to redefine the rules of the game. For long-term investors, the question is not whether Meituan is losing money today, but whether its core business model and user retention strategies can withstand the storm and emerge stronger.

The Price War: A Double-Edged Sword

The war for dominance in food delivery and instant commerce has turned into a race to the bottom. Alibaba's Ele.me and JD.com's aggressive subsidies—coupons, flash sales, and delivery incentives—have forced Meituan to match their spending, squeezing profit margins. The cost of revenue ratio for Meituan's core local commerce segment hit 66.9% in Q2 2025, up 8.1 percentage points year-over-year, as courier incentives and marketing expenses surged. Meanwhile, JD.com's profits plummeted by 51%, and Alibaba's growth slowed, proving that no player is immune to the financial strain of irrational competition.

The immediate pain is undeniable. Meituan's shares hit a one-year low in Hong Kong, and analysts like Citi have downgraded the stock, citing uncertainty over when the price war will stabilize. But Meituan's leadership, led by CEO Wang Xing, has made a calculated bet: prioritize market share and user retention over short-term profitability. This strategy hinges on the belief that the company's long-term profit target remains intact, provided it can weather the storm and capture a larger portion of the consumer wallet as competition rationalizes.

Core Business Model: A Fortress of Innovation

Meituan's ability to endure this price war stems from its robust core business model. At its heart is the “Super App” ecosystem, which integrates over 200 services—from food delivery and ride-hailing to movie tickets and beauty services—into a single platform. This ecosystem has grown to 81 million monthly active users (MAUs) as of June 2024, a testament to its stickiness. The app's AI-driven logistics network, bolstered by a $100 billion, three-year investment in AI and infrastructure, has reduced delivery times by 20.96% and courier travel distances by 23.77%. These efficiencies not only enhance user satisfaction but also create a moat against rivals.

Moreover, Meituan's B2B tools—precision marketing platforms, real-time distribution systems, and cloud ERP—have become a critical differentiator. By empowering small and medium-sized merchants with data-driven insights and operational efficiency, Meituan strengthens its network effect. For example, the Pin Hao Fan service, targeting budget-conscious consumers with high-quality meals, has achieved 8 million daily orders, demonstrating the company's ability to innovate and capture niche markets.

Pricing Flexibility: Balancing the Books

While Meituan's pricing strategy appears aggressive, it is far from reckless. The company has shown flexibility in adjusting incentives and subsidies to maintain user engagement without sacrificing long-term value. For instance, its focus on “customer-centric” initiatives—such as personalized promotions via Bonus Fandom Groups and WeChat Mini Programs—has proven more effective than blanket discounts. These tools generate “private traffic,” allowing merchants to directly engage with consumers and foster loyalty.

However, the price war has forced Meituan to increase marketing expenses by 52% year-over-year in Q2 2025. This spending is a double-edged sword: it sustains growth but risks depleting cash reserves. With RMB171 billion in cash and zero debt, Meituan has the liquidity to outlast rivals, but the question remains whether it can rein in costs as the market stabilizes.

User Retention: The Key to Survival

Meituan's user retention metrics are a critical barometer of its long-term resilience. The company's AI-driven logistics and personalized services have kept users coming back, with average order frequency and spending per user rising steadily. The integration of instant retail services like Flash Buy and XiaoXiang Supermarket further deepens user dependency, creating a flywheel effect where more services lead to more engagement.

Yet, user retention is not immune to external pressures. JD.com's publicized criticism of Meituan's labor practices—accusing it of unfair treatment of delivery riders—has shifted the narrative from pricing to ethics. While Meituan has dismissed these claims as “unfounded,” the scrutiny highlights a growing regulatory and societal focus on gig worker welfare. This could force the company to allocate resources to social insurance initiatives, adding another layer of cost.

Financial Resilience and Strategic Patience

Meituan's financial position remains a cornerstone of its resilience. Despite a 10.1% year-over-year decline in adjusted net profit, the company's RMB171 billion cash reserves and zero debt provide a buffer against short-term volatility. This financial flexibility allows Meituan to invest in long-term projects, such as its $1 billion international expansion into Brazil and Saudi Arabia. While these ventures are currently loss-making, they align with a broader vision to become a global leader in instant commerce.

The company's strategic patience is also evident in its approach to the price war. Unlike Alibaba and JD.com, which have pledged to “cool down” discounting, Meituan has taken a more measured stance, focusing on operational efficiency rather than outright subsidy cuts. This approach, while costly in the short term, positions the company to capitalize on market share gains once the dust settles.

Risks and the Road Ahead

The risks are clear. Regulatory crackdowns on “toxic” pricing practices could force Meituan to scale back aggressive subsidies, potentially ceding ground to rivals. Labor-related controversies could also erode brand reputation and increase operational costs. Additionally, the saturation of the domestic market may limit growth unless international expansion delivers on its promises.

For investors, the key is to assess whether Meituan's current losses are a temporary phase or a sign of structural weakness. The company's 69% market share in food delivery, coupled with its AI-driven logistics and robust cash reserves, suggests it is well-positioned to endure the price war. However, the timeline for profitability remains uncertain, and patience will be required.

Investment Thesis: A High-Risk, High-Reward Play

Meituan's stock is a high-risk, high-reward proposition. The company's long-term value hinges on its ability to:
1. Maintain its 60–70% dominance in food delivery through superior logistics and user retention.
2. Scale its New Initiatives segment (e.g., instant retail, AI tools) into profit-generating engines.
3. Navigate regulatory and labor challenges without compromising growth.

For long-term investors, Meituan's strategic patience and financial resilience make it an attractive, albeit volatile, holding. However, those with a shorter time horizon may find the current valuation and profit outlook too precarious. The company's success will ultimately depend on its ability to balance short-term pain with long-term gains—a test of its leadership's vision and execution.

In conclusion, Meituan's price war is a battle not just for market share, but for the soul of the on-demand economy. While the immediate financial toll is steep, the company's innovative business model, pricing flexibility, and user retention strategies position it as a formidable contender. For investors willing to ride the turbulence, the rewards could be substantial—but only if Meituan can prove that its race to the bottom is, in fact, a ladder to the top.