Originally published by Sramana Mitra on LinkedIn: Unicorn Ele.me Consolidates Market, But Profits Are Elusive

Analysts estimate that the number of people in China who use online food ordering services will grow from 256 million people in 2016 to 346 million this year. Food delivery companies currently cover 1,300 cities in the country. Analysts estimate that the market will be worth 240 billion yuan (~$37 billion) next year. Billion Dollar Unicorn Ele.me is a leading player in this segment.

Ele.me’s Offerings

Shanghai-based Ele.me, which translates to “Are you hungry?”, was founded in 2008 by Zhang Xuhao, a mechanical engineering student at Shanghai Jiao Tong University. The idea for Ele.me came to Zhang when he was unable to find anyone to deliver food one night at the university. Soon, Zhang launched an online portal Ele.me that allows users to order meals from restaurants. Initially Zhang, along with his co-founders, visited restaurants near the university campus and got them to sign up on the platform. As the news of its offering spread, Ele.me expanded to multiple university campuses and cities.

Today, Ele.me operates in 260 cities across China and has tie-ups with more than 300,000 restaurants. It records nearly $9.5 million in daily orders from its 40 million customers. It employs more than 10,000 people to help fulfill these orders.

Ele.me’s Financials

Ele.me charges a fee from the restaurants for orders placed through its platform. Last year, it had processed nearly $192 million of food orders. Recent estimates of $9.4 million daily in transaction value imply a run rate of over $3 billion. Ele.me’s commission rate is still not known, but it was reported that it was trying to raise its fee to 5% last year. At 5% fee, it is trending at annual revenues of $171 million.

Ele.me is still not profitable, and Zhang thinks that it is still too early to think about profits. Profits are elusive because, like rivals, Ele.me is also spending heavily toward customer acquisition, offering heavy discounts, and higher employee incentives.

Ele.me has been venture funded so far with $3.3 billion in investments from Alibaba Group, Sequoia Capital, Tencent Holdings, CITIC Capital Holdings, and Hualian. Its latest funding round was held in June this year, when it raised $1 billion primarily from Alibaba. The round valued Ele.me at $6 billion, doubling its 2015 valuation.

Till recently, there were three big players in the Chinese food delivery market – Tencent-backed Meituan Dianping, Alibaba-backed Ele.me, and Baidu-backed Waimai. Meituan is the biggest player with 45.2% market share followed by Ele.me’s 36.2% share. Waimai came in a distant third at 6.3% share. But recently, Baidu announced plans to exit the food delivery market. It sold Waimai to Ele.me for an estimated $800 million. It appears to be a heavily discounted sale considering that Waimai’s valuation was estimated at $2.5 billion last year. The acquisition will help Ele.me narrow Meituan’s lead.

Overall, the food delivery industry needs to figure out how to make its business model profitable. The profit problem is not restricted to China. Global players are also facing a similar issue. Delivery Hero, which recently went public, reported revenues of $330.7 million and losses of $178 million last year. The company is currently trading on the Frankfurt Stock Exchange at a valuation of $5.5 billion. Delivery Hero’s valuation also puts a question mark on Ele.me’s current valuation as it is nearly half the size in terms of revenues, but boasts a higher valuation.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

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