After organizational and business adjustments, Douyin's local services have brought back its food delivery service, which seemingly contradicts its previous strategic direction, reflecting its indecisiveness in local services.

The local services sector has entered a fierce competition phase, but Douyin seems hesitant in its strategic positioning, with its business development direction still unclear. According to 36Kr, in August, Douyin's food delivery service, which was originally part of its e-commerce instant retail, was internally announced to return to its local services business line. This is the second structural adjustment to Douyin's food delivery business within half a year. In early April this year, Douyin's food delivery business underwent a transfer from its local services business line to its e-commerce business line. Since the change of leadership last year, Douyin's local services have undergone multiple rounds of structural and business focus adjustments. In March 2024, Douyin reorganized its industry-based departments into northern, central, and southern regions and a national chain brand department. In April, the food delivery business was transferred to the e-commerce sector, highlighting a strategic focus on the local market.

In particular, by increasing the GMV share of national chain brands to 50%, raising hotel and travel commissions, targeting top brands, and reducing reliance on small stores, Douyin aims to achieve the 600 billion sales target set by Pu Yanzi.

However, the return of the food delivery business seems to contradict previous strategies. Douyin's food delivery has a limited scale and a long operational chain, requiring coordination of multiple resources, resulting in high investment and unstable returns. This shift may reflect internal strategic dilemmas at Douyin.

First-quarter 2024 data shows that both Douyin and Meituan achieved 100 billion in local services sales, but Douyin did not narrow the gap with Meituan. Despite adjustments to organizational structures and enhanced business collaboration by the respective leaders to break this balance, the market feedback has not been significant.

With Douyin's food delivery returning to the local services sector, the business landscape is changing again, potentially ushering in a new round of market reshuffling. Notably, Pu Yanzi, the head of ByteDance's local services business, has been on vacation for three weeks. Whether this change signals a strategic turning point remains to be seen, but it undoubtedly indicates that the old balance has been broken, and a new competitive landscape is brewing.

01 "Hot Potato" Douyin Food Delivery

Before Pu Yanzi took over as head of Douyin's local services in late 2023, the biggest complaint within Douyin about its local services business centered on consumer experience.

According to Zoumaku Finance, "Zhang Lidong criticized him (Zhu Shiyu) for not doing well in consumer experience, so nothing was done well, causing injury to both sides." Historically, Douyin's food delivery service began exploring in 2020, became more active in 2022, partnering with Ele.me and launching group buying and delivery services. It also collaborated with SF Express, Dada Nexus, and Flash Express to solve group buying and delivery issues. However, in 2023, Douyin's food delivery entered a bottleneck.

According to LatePost, Douyin's food delivery GTV (Gross Transaction Value) continuously declined to 50 million yuan in January and February 2023, with a slight rebound to 100 million yuan in March. From January to March 2023, Douyin's food delivery maintained an average daily order volume of 10,000 to 20,000 orders. In May, daily orders rebounded due to platform subsidies, exceeding 100,000 orders, but this was still far from the 100 billion GTV target. Ultimately, Douyin lowered its annual GTV target for food delivery from 100 billion to 5 billion. Objectively speaking, the high-frequency nature of the food delivery business requires the participation of merchants, customers, riders, and the platform, necessitating long-term and significant investments. For a company like Douyin that prioritizes ROI, this is not easy.

Image source: Douyin

Specifically, in local services, Douyin's food delivery ultimately impacted the overall local services experience. From Pu Yanzi's actions since taking office, quickly shedding the burden of Douyin's food delivery can almost be considered the first task after the organizational restructuring of Douyin's local services. Unloading this burden seems to signal the beginning of renewed efforts, followed by continuous actions in local services, from adjusting hotel and travel commissions to focusing on national chain brands, with refined KPI standards.

As the head of Douyin's commercialization, Pu Yanzi, according to third-party descriptions, can not only mobilize Douyin's commercial traffic but also commercial traffic resources from products like Toutiao, Xigua Video, Autohome, Huoshan Video, and Tomato Novel. This is one of the reasons why Pu Yanzi is confident in raising the performance target to 600 billion. From the perspective of organizational restructuring, Pu Yanzi has also been followed by competitor Meituan.

Wang Xing also adjusted Meituan's organizational structure in April, integrating on-site and home delivery services into a core local business division led by Wang Puzhong. This move was almost simultaneous with Douyin's adjustment, indicating similar strategies: leveraging larger scale and more business coordination for frontal offensive and defensive maneuvers. After the second quarter, although there are no definitive data to determine a winner, from the secondary market perspective, Meituan's share price rose by 14.77% in the second quarter, while Douyin's outlook was not as optimistic. The return of Douyin's food delivery, a hot potato, to local services undoubtedly added to the burden, while from another perspective, it may indicate that Pu Yanzi's series of attempts did not meet expectations.

02 Local Services Disappointed by Algorithms

In terms of business, dining-in restaurants, dining-in comprehensive services, and hotel and travel make up the foundation of Douyin's local services. However, over the past year, Douyin, known for its traffic algorithms, seems to have struggled to make further progress in multiple aspects.

In hotel and travel, Douyin faces pressure from low prices and low redemption rates. According to a hotel live streaming manager on Douyin, hotel merchants have flocked to Douyin's live streaming rooms, raising their expectations for live streaming efficiency and results, leading to increasingly competitive pricing.

Selling products on Douyin this year has been more difficult than last year, with slightly worse results and traffic. The algorithm for live streaming selling has been adjusted, and now the average dwell time in some hotel live streaming rooms on Douyin is less than a minute. Low pricing strategies are highly attractive to price-sensitive consumers. However, if left unchecked, it can easily lead to localized or even widespread price wars. On the other hand, Ctrip's surge this year and rising market value indicate that from an investor's perspective, Ctrip, which focuses on mid-to-high-end and cross-border travel, has withstood Douyin's challenge. In the more critical areas of dining-in restaurants and dining-in comprehensive services, based on the location model, Douyin has not broken the supply-demand relationship but only solved information matching issues within a certain range.

Image source: Meituan

This means that the core advantage of traffic irrigation in Douyin's e-commerce model, which aims to improve information distribution efficiency and solve supply-demand allocation, will be greatly weakened in the local services sector where supply and demand are not imbalanced. The few areas of focus are more on national chains and regional chains. However, even top chains are struggling. Based on Douyin's ecosystem, low prices are the best way to attract traffic, but they are not sustainable and have a narrow product range. The most obvious example is Starbucks, where Douyin's impact as a top chain is limited. Secondly, Meituan has targeted responses with "Explosion Group" and "Lightning Grab." In addition, compared to chain brands, non-standard businesses still occupy a larger share of local services, and mom-and-pop stores make it difficult to shorten the industrial chain. The result is that small and medium-sized merchants relying on Douyin's online traffic do not have enough cost support for content creation, traffic distribution, and promotion. According to public reports, since taking office, Pu Yanzi seems to have adopted a strategy of focusing on the big and ignoring the small. According to LatePost, in 2024, while setting a higher sales target for life services, Douyin also seeks to achieve break-even as soon as possible. Insiders revealed that advertising will be the focus of Douyin's life services this year. Compared to driving sales and earning commissions by mobilizing sales teams, guiding merchants to advertise on the platform may be easier to generate profits. By July, according to reports, Pu Yanzi directly stated internally that Douyin Fresh will increase the proportion of national chains, while small stores will not be the focus, requiring them to develop their own content capabilities.

03 Retracing Old Paths, Competition Among Giants

The return of Douyin's food delivery, to some extent, has once again plunged Douyin's local services into the same river, reflecting the reality of its operations in this sector. In terms of growth rate, rapid expansion has always been a hallmark of Douyin's local services. In 2023, the GMV of life services reached approximately 310 billion yuan, and the 2024 target for Douyin's local services GMV is set as high as 600 billion yuan. However, amidst this growth, it can be seen that Douyin still hopes to increase revenue through light, fast, and agile methods.

According to public reports, Douyin's investment in local services is primarily in traffic support and exposure opportunities, with little involvement in infrastructure. The most notable example is that on October 25, 2023, Douyin Life Services announced that it would invest 500 million yuan over the next year to encourage and support KOLs to explore stores and facilitate business deals between merchants and KOLs. This 500 million yuan support includes cash subsidies to encourage KOLs to accept business deals, the launch of "Exploration Treasure" to match merchants with store exploration KOLs, training and guidance for store exploration KOLs, and more. The aim is to help merchants more accurately match suitable KOLs, improve operational efficiency, and allow KOLs to earn higher incomes from product sales.

Supporting content and enabling creators to profit is similar to Douyin's e-commerce approach. However, for local services, which are inherently slow-growing, enhancing traffic and content alone has limited potential. On the other hand, recent moves by tech giants do not seem to be giving Douyin time to catch up.

Recently, Alibaba and JD.com almost simultaneously announced increased investment in instant retail. "In terms of local services, we need to increase scale and order volume while improving the unit economics model," said Alibaba CFO Xu Hong during a recent earnings call. Alibaba's focus on local services undoubtedly represents confidence in Ele.me's future, while Douyin, which has already collaborated with Ele.me, seems to be facing new challenges. After all, in July this year, Taobao added "Hourly Delivery" as a primary traffic entrance on its homepage. Meanwhile, JD.com integrated its past "JD.com Hourly Delivery" and "JD.com Home Delivery" services into "JD.com Instant Delivery" in May and placed a primary traffic entrance in the top right corner of the JD.com app homepage.

From a broader perspective, Alibaba and JD.com, with their mature delivery systems, pose a dimensional reduction threat to Douyin. The changes in local services seem to have ushered in a new chapter. As the magic of traffic hits a bottleneck, who will break the deadlock remains to be seen.