With the stable pattern of 'two superpowers and multiple strong players,' there is more potential in price reduction in the existing market than in expanding into lower-tier cities. To surpass the 'two superpowers,' efforts must be focused on subtleties and leveraging platform attributes to multiply effects.

Content/ Zhong Qin

Editor/ TV

Proofread/ Mangfu

From being regarded as 'the last gold mine of the internet' to becoming a 'war zone' for major platforms, how much opportunity remains in the increasingly crowded local life services sector?

Firstly, it is crucial to clarify that the status of the local life services sector as a 'gold mine' remains unchanged. According to iResearch data, the online penetration rate of the local life services market will increase from 12.7% to 30.8% between 2021 and 2025, with the market size expected to reach 2.5 trillion yuan by 2025. The success of platforms also underscores the sector's value, with Meituan reporting a 21% year-on-year revenue growth in Q2 2024, setting new highs for merchant and active user counts, and Douyin surpassing its 2023 GMV in just the first eight months of 2024, achieving comprehensive profitability.

However, the growth rate, scale of the overall market, and revenue growth of top players do not necessarily indicate an incremental market for local life services. Compared to e-commerce, it leans more towards competition for existing resources, with platforms overlapping significantly in coverage, user base, and merchant resources. The aforementioned growth rates merely reflect the untapped potential within the existing market.

From an industry perspective, Douyin and Meituan have established a 'dual superpower' competition in on-site services, leveraging lower prices and enhanced user experiences to attract merchants and users in a zero-sum game-like scenario. Meanwhile, Xiaohongshu, Kuaishou, and WeChat Video strive to find their niches and refine methodologies tailored to their platform attributes for local life services.

With platforms constantly increasing investments, the 'two superpowers and multiple strong players' landscape is stabilizing, making it less likely for a dark horse to emerge. After all, most capable players are already in the game, and the real competition now lies in the ability to focus on subtleties.

Looking ahead, first- and second-tier cities are gradually saturating, making steep market penetration curves unlikely. Platforms will primarily target third- and fourth-tier cities, aiming to replicate past successes in lower-tier markets. However, whether these markets can become new gold mines for local life services remains questionable.

Ultimately, the essence of local life services is as a 'search tool,' requiring a sufficient number of merchants and users to unlock its commercial value. In lower-tier markets dominated by offline relationships, there is limited scope for significant expansion.

The narrative of this story is gradually becoming clearer: the real question for local life services now is how much stake can players left at the table claim and how they can win more chips.

Part.1

Price Reduction is More Enticing Than Market Expansion

Since Douyin's aggressive expansion into on-site group buying at the end of 2020, the local life services sector has welcomed a new wave of players. Major internet platforms have begun to tap into the magic of 'group buying,' with even map and ride-hailing apps joining the fray, in addition to the likes of Xiaohongshu, Kuaishou, and WeChat Video with suitable user bases.

However, the capacity of the local life services sector is limited, and the simultaneous entry of multiple platforms in a short period will inevitably dilute individual platform order volumes. Compared to the past, market growth rates have become more about hype than substance.

As a result, local life services are following the path of e-commerce, aiming to replicate Pinduoduo's success in third- and fourth-tier cities by targeting a larger user base. However, as mentioned earlier, the local life services sector may not be well-suited for these markets. In other words, high growth rates comparable to those in first- and second-tier cities are unlikely in lower-tier markets.

Firstly, merchants in lower-tier cities have yet to develop a habit of using local life services platforms. According to media reports, Kuaishou CEO Cheng Yixiao visited Yulin, Shaanxi Province, in late 2022 to investigate local life services and found that "in third- and fourth-tier cities, the penetration rate of local life services to on-site visits is not high, and many merchants do not operate on Meituan or Dianping."

The market still needs time to educate merchants, and it may be difficult for platforms to generate revenue from them in the short term. Meanwhile, local life services platforms primarily rely on paid search rankings and advertising for revenue, which can be a significant barrier for cost-conscious small and medium-sized merchants in third- and fourth-tier cities. Merchants may struggle to absorb the impact of marketing expenses on their profits.

Although leading catering and beverage brands are expanding into lower-tier markets, seemingly bringing paying customers to local life services platforms, these brands already have built-in traffic and may not rely on platforms to the same extent as merchants in first- and second-tier cities.

Secondly, it is challenging to tap into new users in the lower-tier market segment of local life services. On the one hand, the demographic structure of these markets makes it difficult for older users to adopt platforms. On the other hand, the scarcity of merchant resources diminishes the tool's attribute of reducing search time for users.

Overall, the commercial value of local life services stems from 'making merchants visible,' which presupposes a sufficient number of merchants and users. Lower-tier markets have yet to meet this criterion, making it difficult to replicate the 'Pinduoduo-like myth' in the e-commerce sector. After all, e-commerce sells nationwide, while local life services are inherently localized.

Compared to lower-tier markets, the real 'downward' opportunity for local life services lies in price reductions. Typical examples include Meituan's 'Pinhaofan,' integrated membership programs, and the 'Off-Peak Group Buying' launched by both Meituan and Douyin.

According to Meituan's 2024 interim report, 'Pinhaofan' performed particularly strongly in the second quarter, with a peak daily order volume exceeding 8 million. As of September 2024, 'Pinhaofan' has been launched in 49 first- and second-tier cities. By further reducing prices for home delivery, 'Pinhaofan' satisfies users' demand for lower prices, driving growth in merchant business and creating a positive flywheel effect. Additionally, Meituan's integrated membership program, bridging on-site and off-site services, also leverages the membership system to reduce prices on the on-site side.

Although Meituan's 'Pinhaofan' product is currently controversial, the order volume suggests that the path of price reduction is promising. The only challenge is balancing merchant order volumes and per-order profits.

Douyin's launch of 'Off-Peak Group Buying' further corroborates the feasibility of price reduction. Essentially, it guides users to 'visit off-peak hours' and enjoy lower prices for the same packages during weekdays or other low-traffic periods. The price difference for 'Off-Peak Group Buying' packages is reportedly around 30-50 yuan.

On the one hand, 'Off-Peak Group Buying' can distribute the operating pressure during peak hours, improving operational efficiency for merchants. On the other hand, it also satisfies users' pursuit of lower prices for the same packages.

'Pinhaofan,' integrated membership programs, and 'Off-Peak Group Buying' all promote price reductions in first- and second-tier cities, demonstrating that despite their high penetration rates and saturation, there is still room for growth in the existing market through diversified pricing strategies. Firstly, the sufficient number of merchants and users in first- and second-tier cities can support platform growth demands. Secondly, these strategies inherently leverage existing merchant resources, eliminating the need for new city expansion and ground promotion costs.

Part.2

Competition and Complementarity Between the 'Dual Superpowers'

Douyin, armed with its traffic, is seen as the biggest rival to Meituan, the established leader in local life services. However, based on their current performance, while Douyin has achieved impressive growth, it has yet to fully shake Meituan's position.

The relationship between Meituan and Douyin is nuanced; they are both fierce competitors and collaborators working together to grow the overall market.

From a strategic perspective, the introduction of Douyin's 'Off-Peak Group Buying' embodies another logical thread: local life services lack revolutionary innovations, necessitating efforts focused on subtleties to revitalize resources. This is a direct manifestation of intensifying competition within the sector.

Turning to Meituan, its more impressive growth lies in instant retail, with 6.2 billion orders delivered in Q2 2024. Its offline delivery fleet and increasingly sophisticated delivery system have fortified its moat in the local life services sector.

In terms of on-site services, Meituan's core competency lies in its merchant resources and the integration of home delivery and on-site scenarios. Merchant resources are not just about scale but also a strategic asset for Meituan. Over the years, Meituan has honed its skills in working with merchants, refining coarse operating models and enhancing merchant operating efficiency and loyalty through finer-grained approaches.

From integrated membership programs to self-pickup stores and satellite takeout outlets, Meituan excels at uncovering latent demand among both supply and demand sides. While it may not replicate the aggressive stance of the 'Thousand Groupons War,' its more conservative approach underscores its advantages in local life services.

Douyin's strategies mirror yet differ from Meituan's. Like Meituan, Douyin also leverages subtle moves to boost merchant operating efficiency and order volumes.

For instance, Douyin is testing a 'convenient price' feature in its local life services sector, which shows users nearby group-buying deals within a 1-km radius at prices lower than regular group buys when they complete a group-buying order. Essentially, this feature expands merchant exposure, precisely matches users with purchasing intent, and drives incremental business within the platform.

However, unlike Meituan, Douyin is still refining its supporting infrastructure, such as payment licenses, and optimizing the shopping experience. Balancing strategic execution with subtle growth opportunities poses a significant challenge, partly explaining why Douyin adjusted its organizational structure this year.

In summary, both Meituan and Douyin are busy searching for optimal solutions within their platforms to gain more initiative in the second half of the local life services race.

In business, there are no permanent enemies. Meituan and Douyin are not solely competitors; the vast market for local life services accommodates the co-existence and growth of both giants. Furthermore, their distinct platform attributes foster complementarity, collectively expanding the market.

From a merchant perspective, Douyin, with its traffic and content, is better suited for short-term marketing strategies, such as grand openings and holidays. Leveraging Douyin's user base and influencers, merchants can maximize order volumes in the shortest time. Meanwhile, Meituan's tool attribute caters to users' active ordering needs, facilitating merchants' regular operations and providing a stable online traffic portal, albeit without immediate buzz.

A combined short-term Douyin and long-term Meituan strategy can cultivate merchants' habit of using local life services platforms. The differing attributes address merchants' needs at different stages, fostering healthier sector development over time.

Part.3

Breakthrough Lies in Platform Attributes

As Meituan and Douyin dominate, Xiaohongshu, Kuaishou, and WeChat Video are also vying for a slice of the local life services pie. These latter platforms, all social media in nature, share similar commercial logics with Douyin, leveraging content and user stickiness for commercialization. However, they have yet to demonstrate notable innovation in implementation or expand into home delivery services, focusing solely on on-site scenarios.

Unlike Douyin, Xiaohongshu, Kuaishou, and WeChat Video have more distinct identities, differentiating themselves from Douyin's 'big and comprehensive' approach by targeting niche audiences and leveraging 'stickiness' for victory. Their breakthrough lies in their platform attributes.

Take Xiaohongshu as an example. Its user base primarily comprises young women in first- and second-tier cities. According to Qiangua data, over 70% of Xiaohongshu users reside in these cities. In essence, Xiaohongshu gathers a high concentration of price-insensitive consumers with a penchant for trying new things.

This is evident in Xiaohongshu's e-commerce commercialization, where it has carved out a niche in a fiercely competitive market with high average order values, dispelling the gloom of industry price wars.

This trend extends to the local life services sector. In H1 2023, Xiaohongshu introduced group-buying activities for coffee, tea, and baking in cities like Shanghai and Guangzhou. While not yet widespread, Xiaohongshu, leveraging its user base and consumption habits, has identified high-value local life services opportunities amid the dominance of Meituan and Douyin.

It is foreseeable that Xiaohongshu's commercialization, encompassing both local life services and e-commerce, will continue to accelerate. As the fastest-growing social media platform, user habits will fuel its development. Xiaohongshu reportedly reached 312 million monthly active users in 2023, up 20% year-on-year.

Kuaishou's platform attributes contrast sharply with Xiaohongshu's. Data indicates that over half of its users hail from lower-tier markets, making it more suitable for low-priced products and third- and fourth-tier cities.

However, as mentioned earlier, cultivating user habits in these markets is challenging, and business alone without habit formation is akin to building castles in the air. Leveraging its user base, Kuaishou faces significant hurdles in improving market conditions alone. Thus, it chose to collaborate with Meituan, combining Meituan's proven operating model with Kuaishou's user advantage to boost penetration in lower-tier markets.

Data shows that in H1 2024, Meituan's monthly order conversion rate in Kuaishou live streams increased by 5 percentage points YoY. According to Kuaishou, GMV from Meituan merchants on the platform surged over 38 times, and order volumes more than tenfold, in June.

The partnership between Meituan and Kuaishou exemplifies a 1+1>2 scenario, though its longevity remains uncertain. For Kuaishou, to maximize platform advantages and minimize costs while maximizing returns, focusing on lower-tier markets and channel partnerships is imperative.

In contrast, WeChat Video's advantages are somewhat muted.

From a user perspective, relying on WeChat, China's largest social media platform, WeChat Video boasts ample traffic but shares the 'big and comprehensive' approach with Douyin, lacking the niche audience advantage.

From a platform perspective, WeChat Video's commercialization process is slower, partly to avoid business bloat impacting user experience and partly to balance its operations with WeChat's core business, such as corporate structure and commercialization priorities.

WeChat Video's most notable strength lies in the 'ecosystem power' conferred by the WeChat platform. It can integrate with WeChat Mini Programs and Enterprise WeChat, streamlining the journey from public domain ordering on WeChat Video to retention in Mini Programs and Enterprise WeChat's private domains. For merchants, a well-established ecosystem enables user data asset accumulation and membership system construction, fostering future development and repurchase rates.

However, ecosystems are not exclusive to WeChat Video. Both Meituan's merchant fan groups and Douyin's official accounts and fan groups constitute 'ecosystem building,' capable of executing the same closed loops as WeChat Video.

Therefore, WeChat Video's breakthrough challenges not only stem from its lack of distinct branding but also internal balance and business resolve.

Under the 'shadow of giants' cast by Meituan and Douyin, Xiaohongshu, Kuaishou, and WeChat Video must precisely target their efforts to reap desirable commercial returns and reshape the 'dual superpowers' industry landscape through scale and compounding effects. Amid homogenization and intense competition, patience and accumulated strength are crucial.