There is a general consensus within the business world that the success of Meituan is inseparable from its invisible offline army. At the 2017 Code Class Annual Meeting, Wang Huiwen, the CEO of the catering platform Meituan-Dianping, took a retrospective look at Meituan through the lens of the fierce group purchasing battle that occured. Did Meituan’s standard strategy really consist of “encircling cities from rural areas” as regarded by outsiders? Can Meituan’s success be attributed to its strategic adherence or tactical flexibility? Meituan’s experiences are worthy of reflection for many of us.

There has been a myth in China that Meituan succeeded with a strategy called “encircling cities from rural areas.” I believe that many of you sitting here have heard of this before. During 2013-2015, many counterparts engaged in the group purchasing business. At that time, Meituan established itself in approximately 100 cities, while Dianping and Nuomi established themselves in 20-30 cities. Since Meituan outnumbered Dianping and Nuomi in terms of the number of cities where they had presence, it was widely considered by outsiders as “encircling cities from rural areas.”

Assuming that this was the strategy, it was actually quite effective. At that time, due to the differences between cities in which Meituan, Nuomi and Dianping had established themselves, Meituan was able to make a profit in quite a number of low-key cities, and then take those profits to larger cities, where they continued to contest with Nuomi and Dianping. As a result, Nuomi and Dianping started to experience losses. As of now, Meituan has merged with Dianping; with regards to Nuomi, they have basically disappeared. Judging from the final numerical results, everyone believes that Meituan’s strategy was very successful.

What I am talking about today is the process of thinking, the rationale, implementation, and adjustment of the actual conditions of the strategy of “encircling cities from rural areas.”

1. The so-called “encircling cities from rural areas” is a misunderstanding.

I joined Meituan towards the end of 2010, and at that time only had a general understanding of what group purchasing was. So when I joined, I asked the question, “In exactly how many cities can we launch this group purchasing business?” Upon hearing my question, everybody began to analyze what the nature of the group purchasing business is? What does customer behavior look like? How much would the operational costs amount to in launching the business in a certain city?

After hearing their analysis, I told everybody that I felt that they could launch the business in my hometown Wafangdian. In terms of the prefecture-level ranking, Wafangdian is approximately in the 300-400 range.

Between late 2010 and early 2011, whether it was on an active or passive basis, group purchasing enterprises needed to make choices with respect to establishing themselves in cities. Although at that time there was a massive war waging among a myriad of different companies, nonetheless, there were 10+ peer companies, who truly posed a competitive threat. In late 2011, Dianping, Nuomi, Dida Group and Manzuo launched their businesses in about 25-30 cities. Lashou, Wowo, 24quan and Tuanbao took on about 150-300 cities. As publicized by Tuanbao at that time, they claimed to top the rankings with a whopping 324 cities.

It is worth noting that out of the nine respective counterparts, the former four started in 25-30 cities, and the latter four set up in 150-300 cities, while Meituan launched in 94 cities. With regards to distribution, Meituan was the only company to set up in 90+ cities. But with respect to the number of cities it launched in, Meituan made different choices from its counterparts. Meituan neither launched in the smallest cities, nor did it launch in the largest cities. I suspect that for a long time, everyone thought that our strategy was to “encircle cities from rural areas,” because Tuanbao, 24quan, Lashou and Wowo had dwindled out of existence much earlier. After the initial competition was over, only Meituan was left to fight against Dianping and Nuomi. Just imagine, if the remaining competition was not with Dianping and Nuomi, but rather with Wowo and Lashou, perhaps people will then conclude that our strategy was to “conquer key cities.” So I think that people’s description of our strategy was back-calculated from our results.

As such, we can infer that the name of the strategy “encircling cities from rural areas” came about as a direct result of Meituan’s competitiveness. Nevertheless, it is a misinterpretation. But now we must ask, why did Meituan just set up business in some 90 cities, instead of 150 or 25? This was a very decisive strategic selection. Meituan spent a considerable amount of time debating this issue at that time. We pictured this as a coordinate with a horizontal and vertical axis. Every point on the horizontal axis represents a city, while the vertical axis represents the quantity in a given city. If you were to position the city with the greatest quantity in the front and the city with the least quantity at the back and draw a chart, you would end up with something similar to what is depicted below.

  （Graph：Size Distribution of Cities）

2. “Meituan is merely launching into a new city as it calculates the bills”

How many cities will we choose to launch into? Which dimension should we start from? What are some key elements which we must take into consideration? When I joined Meituan, we had already established ourselves in 28 cities, but we had determined that it would not be a problem for us to expand to 300 cities. However, it was crucial that we figure out when to launch, and into how many cities. One of the main factors we debated on was the competitive environment involved with group purchasing. This leads to the question, at what point are you approximately able to determine whether you will emerge as a winner, or a loser? In order to devise a high-quality strategy, you must first be able to make a sound judgment with regard to the industry, and there is no room for passivity.

1) The way to choose

At this crucial juncture in time when winners and losers are determined, if peers cannot keep up with competition, it is necessary to consider the next step of survival in order to control where your investment goes. One of the most common ways to control the investment is to “shut down the business in the city.” At this time, one will consider which cities to shut down. There are two possibilities. One possibility is to terminate businesses in key cities, while the other is to terminate businesses in low-key cities. Meituan’s decision at the time was that they would discontinue low-key cities. In fact, most of their industry counterparts followed the same logic, because the key cities are bigger, and the consumption of management resources is relatively small. Moreover, as no one can pinpoint all the merchants in a key city, making it impossible for the competition to strike deals with every potential customer, which means that there are always business opportunities. In other words, when winners and losers are determined, companies will be sure to pull out of small cities.

Another consideration to be made when competing with others, is that you either have to monopolize supply or monopolize demand. In large cities such as Beijing and Shanghai, it is very difficult to monopolize merchants, but in small cities, it is quite easy to monopolize merchants as they are fewer in number. So, in small cities, “defeating the enemy” is equivalent to “decimating the enemy,” but in large cities you can “defeat the enemy” but not “destroy the enemy.” If you can destroy the enemy, then you have a base area on which you can generate profit. Meituan determined that when the point is reached when the winners are set apart from the losers, it will discontinue business in those low-key cities. As of now, Meituan is still making money in those low-key cities.

To be frank, the final outcome is determined by volume and finances. If you have a large volume, yet you are losing large sums of money, it will be hard to emerge as a victor. If you have large volumes and your losses equal those of your competitors, then you still stand a chance. When comparing volume and finances, you need to calculate the input-output ratio. In the first half of 2011, Meituan determined that within one year, the score would be settled in the group purchasing market. All we had to do was pinpoint the exact time and determine which cities had large enough volume to impact the entire market share. In light of this, we discovered it was utterly useless to do business in cities having a ranking lower than 100 to 150. Those cities carried no weight in determining the final outcome, which meant that you need to discard them. The result of failing to do away with them, is that you will have continual capital investments and management costs. As a result, Lashou and Wowo exhausted vast amounts of capital in investment and management costs, without generating sufficient business volume to influence the market landscape.

2) Timely adjustment of strategic thinking

At the beginning of 2011, when it came to the management quality, all our peers scored quite poorly. No one stood out in this regard, including Meituan. Because the number of cities one is able to manage is limited, and the management range broadens, the input-output ratio decreases, and as a result, the corresponding financial level also decreases. At that time in 2011, Meituan lacked knowledge in terms of its ability to expand the business to various cities, as well as its ability to manage well. First of all, we thought that launching in 28 cities was not enough and that we should increase that number. However, we needed to test the waters in terms of exactly how many cities to establish ourselves in, and as to the correct input-output ratio.

Under observation we continued to expand until we reached 90 cities. Then one day Wang Xing said to me, “I feel that something is not right.” At that time, it was not in our plans to expand the business from 1 to 100 cities. We had set up in a city called Chifeng. Chifeng was a city with a ranking around 200. We quickly discussed our current management situation and problems relating to our business exposure. We all realized that perhaps we had made some mistakes moving into certain cities.

It was in a timely manner we stopped, re-evaluated, and determined which cities we had mistakenly moved into. After deliberation, we determined that there were about four cities into which we had mistakenly moved into. But the issue of whether or not to shut down operations in certain cities was even more problematic. After a prolonged discussion, we arrived at the decision to shut down operations, which I felt was especially crucial.

3) Persistently “do the right thing”

2H 2014 to 1H 2015 was a period in which China was plagued by a large internet bubble causing many entrepreneurs to hit rock bottom. One of the reasons for the crash was their inability to pull the plug when necessary. Of course, I can relate to that. With Meituan, for instance, when we had to drop a city in which we had already started operations in, investors began to doubt. What about team morale? To make matters worse, Meituan was still fundraising at that time. These were all problems that we needed to face. However, there is a key difference between “doing the right thing” and “doing the easy thing.” Back then, Meituan respectively terminated operations in four cities, Longyan, Ma’anshan, Yulin, and Chifeng. This posed a tremendous challenge for us, as our industrial peers blackmailed us and posted defaming claims that our financing chain had broken, that we were pulling the plug in certain cities, and that it was game over for Meituan. In spite of this, Meituan braved the storm.

By now everybody can probably see that throughout the entire process, Meituan never once mentioned encircling cities from rural areas, or, about key city strategies. Rather, we merely established operations in new cities, while at the same time calculating our bills, until we reached a point where we promptly pulled the plug, and that’s that.

3. Remain committed to the right strategy and see payback sooner than imagined

I guess that many people are oblivious to the fact that Meituan’s financing figures at that time were the lowest among the whole group purchasing sector. Lashou’s fundraising was very robust, and they eventually raised USD $165 million in financing. Wowo raised even more than USD $165 million. Yet Meituan only had raised a mere USD $62 million then. We were short of money, so we needed to ensure that our input-output ratio was large enough.

Throughout the whole input process, Meituan had a focus. As a matter of fact, Meituan’s input in the cities ranging from 25-94, was greater than in key cities. For example, we dispatched 10+ business people to cities with a caliber such as Xiangyang and Handan, while concurrently placing 80 people in Beijing and another 60 in Shanghai. If you compare the volume of Beijing, Shanghai, Handan and Xiangyang, then Meituan’s resource input into volume-rich Beijing and Shanghai was far from enough. Of course, the investment in manpower in these cities was not entirely our initiative. Nevertheless, we realized that in cities such as Beijing and Shanghai, you can win the competition, but not destroy them. This had a direct bearing on our ability to settle the scores in those cities with a ranking of 25-94. As soon as our competitors pulled out of those cities, we moved in, took over and started making profits. It was at this point in time, that everyone started talking about the so-called “encircling cities from rural areas” strategy. 

This type of strategy brings its own set of challenges. One of the challenges is the board of directors. For the longest time, we were unwilling to convene board meetings, because all the board members resided in Beijing and Shanghai. Since our resource input in Beijing and Shanghai was inadequate, we were lagging behind in those two locations. Some investors told me, “I bought some more Nuomi shares today” or “take a look, if you open the Meituan APP, I cannot find any of the merchants I like.” Series A and Series B investors do not have enough time and energy to analyze each individual city. Consequently, we always needed to explain to them that Meituan has other cities that are faring quite well, and that they need to look at the overall figures. Of course, there is another option, which would be to pump a lot of resources into Beijing and Shanghai. In doing so, investors would feel quite pleased, but then our model would end up being “2 VC” (to Venture Capital) instead of “2C” (to Consumer).

Even if you utilize the right strategy, when it comes to the execution, you will encounter many challenges. These challenges stem from the investors, the sales team, the management level, as well as one’s own inner fears. So when you employ the right strategy, you must make one right choice. Remaining committed to doing the right thing is substantiated in every choice regarding resource input, product iteration and direction. Indeed, if you remain committed to doing the right thing, and persist on positive results, the payback cycle will often materialize in a much shorter period than you imagined.

For example, in April 2011 Meituan shut down its operations in four cities. This gave rise to a lot of anxiety among the sales team. But by September, both Lashou and Wowo held back and started to lay-off employees. Through this, the team came to the realization that Meituan was more future-oriented and had more in-depth insights on the industry – insights that would lead to our final victory. In 2012, we needed to explain to investors why Beijing and Shanghai were lagging behind. By 2013, investors got a taste of the brunt force of the so-called “encircling cities from rural areas” strategy and acknowledged the team’s strategic choice.

This is what I wanted to share with you today, I hope that it will inspire you. Thank you everyone!