Meituan

HKEX:3690

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Meituan Third Quarter 2021 Earnings Conference Call. [Operator Instructions] After the speaker's presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Scarlett Xu. Thank you. Please go ahead.

[Scarlett Xu, executive]

Thank you, operator. Good evening, and good morning, everyone. Welcome to our third quarter 2021 earnings conference call. Joining us today are Mr. Xing Wang, Chairman and the CEO; and Mr. Shaohui Chen, Senior Vice President and CFO of Meituan. For today's call, management will first provide a review of our third quarter 2021 results and then conduct a Q&A session. Before we start, we would like to remind you that our presentation contains forward-looking statements, which include a number of risks and uncertainties and may differ from actual results in the future. This presentation is based on our management accounts, which have not been audited or reviewed by our auditor. This presentation also contains unaudited non-IFRS financial measures that should be considered in addition to and not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to the disclosure documents in the IR section of our website. Now I will turn the call over to Mr. Xing Wang. Please go ahead, Xing.

[Xing Wang, executive]

Thank you, Scarlett, and hello, everyone. Welcome to Meituan's Third Quarter 2021 Earnings Call. For the third quarter of 2021, our total revenue increased by 37.9% year-over-year to RMB 48.8 billion. Adjusted EBITDA and adjusted net loss were negative RMB 4.1 billion and RMB 5.5 billion, respectively, in 2021 and Q3. We further enabled our small and medium merchants and supply chain partners to improve their digital and online operations while also providing consumers with convenient high-quality and value-for-money goods and services. We continue to achieve healthy growth in annual transaction users and annual active merchants reaching 667.5 million and 8.3 million, respectively, in Q3. Transaction frequency also grew to 34.4x for the past 12 months versus 26.8x during the same period last year. Moreover, during and after the Henan flood, we collaborated with the authorities to help affected merchants resume normal operations and help people in need through our various business lines, in addition to helping them rebuild their businesses to the extent we could. We hope to generate more social value in the various businesses we do for the greater community, abiding by our mission, we help rebuild each other for the better. First, on our food delivery. Our business was resilient despite the spread of the Delta variant and impacts of extreme weather. In Q3, our total food delivery orders grew by around 25% year-over-year, while achieving a daily record of over 50 million orders in early August. We are happy to see that our annual active merchants reached a new high of 4.1 million in Q3 for our food delivery business. More merchants came to realize the importance of running online and digital operations, and we are glad that they can see Meituan their trusted partner to increase online revenues. We designed multiple ways to improve merchant operational efficiency. For example, our Food Delivery Manager program as known as [Foreign Language] now operates in over 30 cities and serves more than 30,000 merchants in areas, including store pattern, marketing, event organization and operational analysis. These merchants saw a meaningful increase in GTVs post the training. For new merchants on our platform, we provided tailored training and introductory programs to help them adapt to online delivery quicker and better understand their consumers. In addition, hardware upgrades and digital toolkits were rolled out in August and help the merchant address issues encountered in the ordering process. In Q3, transaction frequency and user stickiness improved as we brought greater diversity and higher-quality categories and consumption scenarios for our platform to better address the evolving consumer taste buds and culinary preferences. Late-night snacks were popular during the summer, as special promotions from quality merchants were provided to consumers in over 15 cities for this category. An interesting example is that spicy crayfish dish was so hot that close to 300,000 merchants now offer this SKU. The milk tea category also saw explosive growth in autumn. We collaborated with over 40 milk tea brands and over 5,000 stores to help them synchronize online and offline marketing to boost the consumption in this category. Alongside our first cup of milk tea in autumn promotions in early August, any orders for this category alone exceeded 12 million orders on that day, setting a new record. In Q3 overall, afternoon teas and late-night snacks categories both achieved around 30% 2-year CAGR in order volume with the drink sub category alone achieving over 70% CAGR. On the delivery side, we were focused on providing more support and care for our couriers in Q3. We hosted more than 110 courier feedback annual sessions across the days as of Q3 and improved their welfare with a more rated feedback by different channels and from different directions.

In Q3, we experimented changing the estimated delivery time for each order from a specific point of time to an extended time period in complicated situations, such as long business orders or in case of heavy order volumes, managing consumer expectations reasonably while alleviating the time pressure for the couriers. We have also been upgrading our order dispatch system to reflect the courier feedback and to ensure a smoother experience for couriers -- for both couriers, merchants and consumers. For food delivery orders, consumers wish to receive orders in a timely manner. Merchants hope to pass orders to couriers as soon as meals are cooked. And couriers hope to pick up all this efficiently along the way. Our upgrades to the order dispatch system focused on meeting these needs. First, we adjusted the pickup process for some pilot restaurants, whereby couriers are assigned and notified to pick up orders only after meals are ready at the use of a new merchant device called smart kitchen in order to relieve the pressure on both couriers and restaurants.

Also, in times of unexpected situations, couriers can report to their station manager through the app to handle and re-dispatch orders to others. Most importantly, our system had prioritized courier's safety to ensure they are not tasked with orders that they cannot handle. While we have made progress here, we are mindful of the fact that all the dispatch system is complex. We have many important variables. We will continue to explore and improve the system as the people are the most critical considerations of our operations. We will also make the algorithms and the systems more transparent, taking in feedback from different parties to iterate our process and promote healthy industry development.

Now moving to our second segment. Despite the impact from Delta variant on macro-consumption environment, our in-store, hotel & travel segment displayed strong growth in Q3. Transaction volumes and GTV and annual active merchants continue to reach new highs for both in-store dining and other in-store services.

In-store dining GTV achieved a 2-year CAGR of over 30% in Q3, despite a significant growth slowdown in August as a result of Delta variant control. On one hand, accelerated digital transformation is an inevitable trend on the supply side. As we continue to build up our merchant service capabilities paid to different restaurant merchants groups, we provided more diversified solutions and brought quality traffic to restaurant merchants in an ever more competitive restaurant market. Merchant penetration also rose as with expanded coverage of a wider merchant base, including chain and upscale restaurants. On the other hand, as consumer demand evolves, so do our strategies towards different culinary categories. During the holidays, we brought more light-meal restaurants online. And during Chinese Valentine's Day, Qixi, our marketing events were effective in encouraging further consumptions with GTV and transaction volume reaching new daily records. Booking restaurants ahead of time on our platform, but also being established as a habit for consumers with higher spending per meal during the holiday. Transaction frequency and user stickiness improved as we provide better services and more desirable supplies. Other in-store services, GTV achieved 38% full year CAGR in Q3, as the merchant and category offerings widened to meet the higher consumer demand for personalized and quality consumption scenario. We also designed more customized services and products targeting different type of merchants, new consumption trends in health care, health-related services, parent, child, business, leisure and entertainment, more exhibited strong momentum. In lower-tier markets, we increased coverage and accelerated supply-side digital transformation, leading to a higher overall merchant base in the play season festival [Foreign Language]. Innovative products across platform promotions further drove in-store category and GTV increase. Hotel booking business was heavily affected by the Delta variant and cross-provincial travel restrictions. The national traveling tourist and tourism revenue in Q3 that's then 60% of the same year in 2019 for the whole industry. SKU -- our domestic room nights in Q3 grew positively relative to the same period in 2019 and 2020.

Growth of local leisure and short-haul travel was stronger than that of long haul and business travel. Our established strength and consumer mind share in local hotel booking and services, local hotel booking services allowed us to remain versatile in the current environment. On the high-star segment, most high-star hotels were on-boarded with a more competitive pricing and better customer service, and the mass room night contribution from high-star hotels was maintained above 16%. And our Hotel+X strategy, we worked with more high-star hotel brands. Collaboration with brands such as [Foreign Language] and Disney live streaming and working closely with the Universal Studio Hotel on its grand opening are just a few examples.

Now let's move to the third segment, new initiatives and others. Our focus is on the retail business to provide greater convenience and variety for our consumers in different consumption scenarios. In Q3, for Meituan Select, our community e-commerce business, we complied with the new regulatory guidelines and ensured reasonable product pricing as we continue to pursue quality growth, elevated consumer experience and with our long-term capabilities.

In response to consumer needs, we increased SKU varieties and offered a wide array of categories. Our investments in cold chain logistics also allowed us to deliver fresh produce and frozen goods on time with a stable quality. Through careful, tailored and targeted strategies at different nodes of the operations. Our operational efficiency increased and our unit economics also improved. In the future, we will persistently improve supply diversities and product quality are continuing to explore differentiated and innovative warehousing and logistic solutions.

Moreover, in the spirit of rural revitalization, Meituan Select collaborated with numerous provincial authorities in Q3 to open up green distribution channels for various farmers to sell their produce. In September, we launched an agricultural festive month to assist over 400 agricultural producers increase sales and build unique local brands. And employment opportunities are created in rural areas throughout the Meituan Select value chain, including new farmer merchants, rural e-commerce leaders and group leaders. We rolled out specific and well-rounded training programs for online marketing and digital operation to support the development of new talents in rural areas in 6 provinces already. Its free training program aimed to help hundreds of thousands of farmer merchants and rural e-commerce leaders in over 160 less developed countries over the next 3 years. Meituan Grocery, our self-operated on-demand grocery model completed Tier 1 market coverage, achieving further user growth. In Q3, GDP increased by over 160% and quarterly transacting users increased by over 100% year-over-year. Operating efficiency improved with our growing scale as we modified warehouse operations and increased logistical efficiency. Putting more emphasis on ROI, our strategy is around products, consumers, warehousing and logistics continue to iterate. Consumer experiences were enhanced as we further shorten the delivery time and provided wider SKU selections with a more diverse fresh produce and FMCG offerings. A key component of our on-demand secure business, Meituan Instashopping demonstrated a strong business momentum in Q3. We believe that the online retail business will evolve from an everything-store to everything-now. On-demand retail supplements were on the traditional retail markets, satisfying changing consumer needs and also accelerating supply chain innovation and online transformations. Leveraging our on-demand delivery network and our comprehensive online fruit teas or merchants, Meituan Instashopping provides consumer goods across a broad expression of product categories, timely risk and consumption scenarios through marketplace model. In Q3, Meituan Instashopping achieved a strong growth on different metrics with the GDP growing by over 100% year-over-year. We launched the promotions on various holidays and festivals in Q3 set as Chinese Valentine's Day and mid-autumn festivals to effectively cultivate the consumer habits and capture mind share. During Chinese Valentine's Day, popular product categories expanded from flowers to gifts such as beauty and through the consumer electronics. The peak daily orders exceeding 6.5 million. On the merchant side, we allocated more resources and deepened the collaborations with high-quality merchants at the supermarkets, accelerating the online transformation of offline retailers. [ GTV-pronged ] supermarkets grew by over 140% year-over-year in Q3. In the medicines vertical, in addition to launching the 24/7 medicine delivery service last quarter, we also deepened our cooperation with offline pharmacies, not only to help them digitize operations, but also work with several partners in launching the 24/7 -- wait a minute. In launching the 24/7 pharmacies only to help them stabilize operations, also worked with several partners in launching the 24/7 smart pharmacies. We believe Meituan Instashopping will continue to strengthen its consumer expansion and achieve the rapid growth. We will leverage our strong marketing delivery and technological capabilities to serve brands and merchants holistically, connecting users with the merchant while creating more values. We are delighted to see that the above retail businesses achieved a notable progress in Q3. Over the years, we have helped the millions of merchants to digitize their operations and use our own smart delivery network, bringing convenient food delivery services to hundreds of millions of consumers. Now we leverage our on-demand delivery network and digital operational capabilities to deliver more categories of goods to everyone's doorstep by Meituan Instashopping and Meituan Grocery. We also have preorder a self-pickup model for next-day delivery via Meituan Select. Certain mass and lower-tier markets with diverse quality and value-for-money products, different retail models. Meituan understands the needs of different consumer types in different consumption scenarios.

More importantly, we will actively help strengthen different nodes of the value chain and accelerate retail industry digital transformation. We are committed to the development of our retail businesses, and we'll continue to leverage technology to accelerate the merchant digital transformation and enhance the efficiency in distribution and logistics. Finally, we received the final decision on the administrative penalty from the SAMR in October. We sincerely accept this penalty and will strictly ensure compliant practices. We will keep compliance as our priority, operate our business in compliance, actively contribute to fair competition in the market, review our social responsibility and most importantly, contribute to the higher quality development of the national economy and society. The penalty reminds us our responsibility to society, encourage us to be more creative and to foster better social values. We will bear our social responsibility in mind, further contribute to the high-quality growth of the national economy, do our best to contribute to the development of the greater society and support the objective of common prosperity through carrying out our mission to help people eat better, live better. With that, I will turn the call over to Shaohui for an update on our latest financial results.

[Shaohui Chen, executive]

Thank you, Xing. Hello, everyone. I will now go through our third quarter financial results. In the third quarter, our total revenue reached RMB 48.8 million, increasing by 37.9% year-over-year. Also our food delivery business and our in-store, hotel & travel business segment achieved resilient growth amid the resurgence of COVID cases, regional driving disruptions and macro environment. Our new initiatives segment also continued its very fast-growing momentum. Our ongoing investment in new initiatives, particularly in our retail business, drove the increase in cost of revenue. As a percentage of total revenue, cost of revenue increased on both a year-over-year basis and on a sequential basis to 77.9%. The growth from previous quarter was also driven by increased incentives for couriers working under extreme weather conditions and in the pandemic environment. Selling and marketing expenses as a percentage of total revenue was 23.3% this quarter, up from 16.5% in the prior year period, but down from 24.8% in the previous quarter. The year-over-year increase was primarily due to increased promotions, advertising and user incentives for business expansion and promotional campaigns. In addition, the increased number of employees, owing to our business expansion, resulted in an increase in employee benefit expenses. The sequential decline was mainly driven by our improved marketing efficiency. R&D expenses as a percentage of total revenue increased to 9.7%, up from 8.4% in the prior year period and 8.9% in the previous quarter. But G&A expenses as a percentage of total revenue increased to 4.9% from 4% in the prior year period and 4.7% during the previous quarter. Both increases were primarily due to the increased number of employees resulting from our business expansion. Our first 2 business segments: food delivery and in the hotel travel segment, achieved solid growth with growing engagement of our consumers and merchants, realizing an aggregate operating profit of RMB 4.7 billion, increasing from RMB 3.6 billion in the prior year. Nevertheless, we recorded a total operating loss of RMB 10.1 billion this quarter, primarily due to the RMB 3.4 billion fine imposed pursuant to China's anti-monopoly law and the rapid expansion of our new business, particularly our retail businesses. On a consolidated basis, both adjusted EBITDA and adjusted net loss experienced negative year-over-year growth for this quarter, decreasing to negative RMB 4.1 billion and RMB 5.1 billion, respectively. Now let's move on to our segment reporting. Starting with food delivery. Although we face the resurgence of COVID cases, regional flooding disruption and overall slowing down of the catering industry, we see both quarterly transacting user scale and their purchase frequency were further stimulated by the expansion in high-quality supply on our platform, our optimized operation for delivering different consumption scenarios and an effective delivery membership program. As such, the daily average number of food delivery transactions increased by 25% year-over-year, even on a very high base from last year. Meanwhile, with more restaurants embracing digitization, online marketing demand remains strong on our platform. The expansion of our advertising merchant base and increasing emerging budgets for online marketing drove the steady growth of online marketing revenue on both a year-over-year and a sequential basis. Monetization rate was 13.4% this quarter, a slight 0.1 percentage point sequential improvement was mainly due to the higher contribution from advertising revenue, while the decrease of 0.2 percentage points on a year-over-year basis mainly resulted from the higher user incentive ratio and a higher portion of incentives that [ contributed ] revenue this quarter. Total food delivery revenue was RMB 26.5 billion in this quarter, representing a year-over-year increase of 28%. On the cost side, delivery cost per order were slightly lower as we compare to the same period last year, increased on a sequential basis due to the increased incentives paid to delivery couriers who were working during summer season, the pandemic situation and extreme weather. Operating profit increased by 14% to RMB 876 million, while our operating margin decreased by 0.4 percentage points to 3.3% from 3.7% on a year-over-year basis, mainly due to higher end-user incentives and spending on brand marketing. Also a decrease in operating profit and operating margin on a sequential basis were primarily attributable to higher incentives for deliver couriers due to seasonality. Now turning to our second segment, in-store, hotel & travel. This segment's quarterly revenue grew by 33% year-over-year despite the negative impact of the spread of the Delta variant and heavy flooding impact in local consumption, especially consumption of travel and hotel booking. We are the go-to platform for consumers exploring cost-effective and diverse services while also serving as an important channel for local service merchants to attract users and increase revenue. Both our in-store dining and other local services demonstrated strong resilience as evidenced by the more than 40% year-over-year growth of our in-store GTV and revenue. Meanwhile, we further deepened our merchant relationships this quarter. Augmenting the variety and quality of supplies on our platform, we are able to satisfy diverse online and offline operation units of merchants as further diversifying and customizing transaction-based products for different service categories. In addition, we continue capturing user mind share through marketing events. As a result, year-over-year growth of our in-store segment commission-based revenue exceeded 40% during this quarter. Our advertising revenue also achieved commendable growth driven by higher adoption rate of advertising products by merchants and their increasing budgets allocated for online marketing. In addition, the mid-autumn festival also stimulated merchant demand for marketing. The adoption rate of our subscription-based services further increased during this quarter with CPC advertising revenue increasing by over 50% year-over-year with respect to our hotel business. The third quarter is usually the peak season for travel. However, delta variant cases in China during the third quarter were headwinds for the domestic travel and hotel booking industry. Even in the face of these short-term challenges, we still achieved positive year-over-year growth of about 5% in domestic room nights. Over the long term, we still believe that the hotel booking business has a strong potential for sustainable growth and scalable monetization. Operating profit and operating margin for our in-store, hotel & travel business increased to RMB 3.8 billion and 43.9%, respectively during this quarter. Both a sequential and year-over-year increase were mainly attributable to our in-store business, which has a much higher operating margin than our hotel & travel business and contribute a higher portion of this segment's revenue this quarter. Let's now turn to our third segment, new initiatives and others. During this period, revenue in this segment increased by 66.7% year-over-year to RMB 13.7 billion, driven by the continued development of our new initiative through [ fixed ] by growing consumer needs. The increase in revenue mainly comes from our retail business. Operating loss for this segment expanded to negative RMB 10.9 billion during this quarter from negative RMB 9.2 billion during the previous quarter, while operating margin decreased by about 2.7 percentage points quarter-over-quarter to negative 79.5%. Our retail business remains a key area for our investment. Our community e-commerce business delivered solid growth in both GTV and sales volume on a sequential basis despite heightened regulation. Although we made investments in further enhancing our supply chain and fulfillment capabilities, our operating loss only widened slightly on a sequential basis. As a result, operating loss as a percentage of total GTV also narrowed on a sequential basis, implying our continued improvement in operating efficiency. For Meituan Grocery, as we further optimize our fulfillment system and label efficiency, operating margin remained stable as compared to the previous quarter, given the launch of new warehouses. In addition, in this quarter, we also increased our R&D spending for vast technology, such as autonomous vehicles, drones and matching technology, which caused our operating loss to expand on a sequential basis. Now turning to our cash position. As of September 30, 2021, our cash, cash equivalents and short-term investments total RMB 120.9 billion. Additionally, our net cash flow from operating activities turned into an outflow of RMB 4 billion during the third quarter of 2021 from an inflow of RMB 3.3 billion for the same period of 2020. This was primarily attributable to losses resulting from our continued investment in retail businesses. For my closing remarks, I would like to highlight 2 points. The national economy has entered into a new phase in which high-quality development will be prioritized. In addition, pandemic prevention measures are being normalized. Against this backdrop, we will continue to promote digitization transformation and further integrate technology into happy aspects of our business segment so that we can leverage technology to power high-quality growth. We will continue to provide firm support for the digitization transformation. For the digital transformation of merchants, especially the integration of local service industry's online and offline operations, in return, the improved the variety and quality of supply on our platform will help us better meet consumers' ever-growing demand. We will also sustain our focus on retail business. We will construct the core capabilities of our retail business with a long-term perspective while maintaining a flexible and sustainable investment case. We will continue to actively follow regulatory requirements to ensure our healthy, sustainable and compliant growth and development. We remain optimistic for our business in terms of long-term development. We adhere to the integration of creating both economic and social value by providing better services to our partners in this ecosystem. With that, we are now open for Q&A.

[Operator]

[Operator Instructions] The first question comes from the line of Ronald Keung from Goldman Sachs.

[Ronald Keung, analyst]

So my question would be on our recent strategy. We noticed that you have recently upgraded strategy from what we used to call Food+Platform, and we read about it. It's now upgraded to Retail+Technology. So could you share with us the rationale and thinking? And in addition, how should we understand the significance of your recent organizational restructuring that we read about?

[Xing Wang, executive]

Yes. Thank you, Ron. Yes, we recently upgraded our strategy from Food+Platform to Retail+Technology. Well, first of all, we are expanding from food to retail. Many people see retail as it is in a narrowest sense, which is a selling boost to consumers as a 2C concept. However, we see retail as a much broader concept. Actually, that's the -- I believe that's the original definition of retail, that's to sell all services to end customers. So I think retail can be classified into food retail and services retail, and the end customer can include both consumers and businesses, especially including small and medium-sized merchants. So in this sense, we may have been in the retail business since day 1. Look at it this way, we started with services retail through the original group purchase [ model ] business back in the beginning of 2010. We then gradually expanded into the goods retail efforts providing restaurant food for consumers through on-demand delivery -- our own on-demand food delivery business. And in recent years, we have expanded our categories of goods from just a restaurant food to other categories through different business models. For some example, we expanded from restaurant food to flowers to medicines to a lot of those categories. And we have made Instashopping, that's a marketplace model. We also have Meituan Grocery, and that's our first-party retailing model. We also have the preorder and self-pickup model for next delivery via our Meituan Select business. These businesses enable us to satisfy the diverse needs of different consumers in different scenarios -- across different markets. Retail will be our focus, to remain at the main area where we will build our fundamental capabilities in future. So please understand retail, in a broader sense, has to sell goods or services to end customers. And second, we have upgraded from platform technology. When we talked about our platform in the past, we were usually referring to the mobile Internet platform. Meituan started as a company from further -- launching website and then launching a mobile app. Our mission is to help people eat better, live better. We can achieve that through the power of technology. Through technology, we help accelerate supply-side digital transformation. It's actually for millions of small- to medium-sized restaurant and local services merchants. This also led to the increase in users and the retention on our platform. We happen to nab the world's largest on demand-driven network through persistent investment in technology over the years. We are leveraging on the on-demand delivery network to deliver almost everything to consumers' doorstep in 30 minutes. Meanwhile, we have invested heavily in relevant hardware equipment and on research and development, particularly around autonomous delivery. Our R&D expenditure increased 58.8% year-over-year in Q3. We have also made equity investments in many related cutting-edge technology use. Tech is critical in satisfying consumers' needs and driving company and industry growth for the betterment of our greater society. As technology developers, we believe we will encompass the broader concept of automation, robotics, renewable energy, the IoT and sometimes biotech and more. As we expanded from food to retail, we need to invest into technology, even in goods distribution and enabling digital transformation across a wider range of merchants throughout the entire logistic process, especially in less developed markets. The continuous development and application of these technologies will change everyone's lives for the better in many different ways, while importantly also helping us to better fulfill our mission. And recently, there was a reorganization at Meituan around our upgraded strategy, goods retail is an area where we expect to see major development in the future. So we established a dedicated senior team as the brain to execute our goods retail strategy and to enhance our organizational capabilities. The adjustment should encourage more synergies and integrations of resources across different business lines, which is critical to building the holistic fundamental retail business capability for the long run. Last but not the least, I would like to emphasize that no matter how our strategy evolves. Our mission remains unchanged, to help people eat better, live better. To achieve this, it requires continuous effort and commitment. We will abide by our mission and help to create greater social value for the greater community while generating business values.

[Operator]

The next question comes from the line of Thomas Chong from Jefferies.

[Thomas Chong, analyst]

I look to start for the food delivery business, the food delivery order volume year-on-year growth decelerate in Q3 versus Q2. May I know the reason for that. Has it been impacted by the recent slowdown in the consumption? And how should we expect the top-line growth rate in coming quarters given the current macro environment?

[Xing Wang, executive]

Thank you for the question. Yes, we can see that the food delivery order volume growth decelerate in Q3 versus Q2. And actually, if you compare to Q1, it's a further decelerating trend. We have a separate reason on this. The first, I think it's easy to understand that due to the pandemic case and control, they all have been a volatile basis that we are facing from last year. So in Q3, we have a much higher base given the delivery consumption recovered during Q3 last year. So on a year-over-year basis, you will see a much lower growth rate. And second, it was also due to the resurgence of COVID cases that you mentioned. And also we have seen the regional flooding disruption during Q3. Since late July, several regions, including Henan province, were impacted by flood, which led to a sharp drop in food delivery order volume in those regions. And then in August, numerous cities had a resurgence of COVID cases. And there have been very strict control on under these regions. I think I need to explain, because sometimes intuitionally, you may feel that even under a highly controlled environment, delivery should be still growing or even people should expect all the more because they cannot go out. But in reality is that when COVID cases happen, when we have very strong strict control, we have seen some very important delivery consumption area will be -- have the impact. For example, hampers, travel areas, even some office areas in which we may have some regulation that people need to stay home or the office. And those are all very -- usually, very important consumption scenarios for our food delivery. So food actually could be heavily affected by this basis. So we have seen this overall basis have negative impact. And finally, on the macro level, as you mentioned, we have seen the year-over-year growth of national cattle industry decelerate also in [indiscernible] about 4% in Q3. If we look at the 2-year CAGR, it's actually a negative 1%. So the deceleration growth of the cattle industry also affected the delivery industry. If we're looking forward, we expect that the growth of the cattle industry could be continued decelerating over the next few quarters on the back of the current macro consumption environment. We expect the price-sensitive consumers, we're likely to have a weaker demand for delivery under this environment. Meanwhile, we have also continued to see -- in Q4, continue to see the COVID cases continue to happen in winter, which will likely further dampen the demand for delivery in tempers' travel and other scenarios. As a result, we expect to see meaningful negative impact on order volumes in Q4 and potentially in the first few quarters of next year. It's worth noting that food delivery order volume -- actually, an analogy, where it usually falls in Q4 as compared to Q3 and aslo fall in Q1 as compared to Q3 and also fall in Q1. Q1 is usually a very low season in terms of order volume. Also Q4 last year, it's a high base -- was a high base. So we're actually speaking for delivery, should be expected to see a relative low growth rate compared to earlier quarters of this year. However, I want to share our long-term view on food delivery. Food delivery business is still, I think, a very promising business in China. We have also seen continued show resilient growth compared to other consumption categories with order volume growing at 25% year-over-year. And actually, in Q3, we have seen some big numbers such as food delivery daily order peak volume reached 50 million in August while milk tea subcategory alone reached 12 million orders peak volume. We believe that by putting more effort into expanding high-quality suppliers, optimizing operation for different product category and different scenarios and acquiring accurate insight into consumers' needs, we are able to more efficiently meet the diversified consumer needs and to improve their transaction frequency and stickiness. Our average monthly food delivery membership subscribers also hit a new record this quarter, reaching over 60 million. In summary, our long-term view on food delivery remains unchanged. We continue to target 100 million orders a day and continue to see food delivery as a long-term growth for the company.

[Operator]

The next question comes from the line of Alicia Yap from Citigroup.

[Yik Wah Yap, analyst]

Could you share with us the impact from the recent SAMR administrative guidance on your food delivery business? How are you adjusting your operation to satisfy these requirements? And also, how will the impact -- how will this impact your financial performance and also the cash flow? Do you expect a similar end-time, on a realistic pressure, on your added business.

[Xing Wang, executive]

Thank you, Alicia. The enforcement and supervision on the food delivery industry from SAMR encourages a healthy and orderly industry development. We are fully supportive because we believe we can have better operations in a fair competitive environment. We fully respect merchants' choices from the beginning of this year. We prohibited any exclusive partnerships. In Q2, we rolled out a new tiered pricing mechanism to promote a more transparent pricing and clearer cost structures for merchants. In the past few quarters, we continued to improve our couriers' welfare benefits. Our food delivery business maintained industry-leading growth and consumer experience. In the past few months, we actively implemented various compliance requirements, but improved our internal control mechanism. We conducted in-depth self-reviews and proactively rectified any issues to ensure full compliance. We set up a compliance rectification working group, headed directly by me to formulate rectification plans according to the requirements of SAMR administrative guidelines -- guidance. We have also founded 6 special teams to oversee antitrust compliance, couriers rise, data compliance, platform governance, feedback reporting and compliant culture development, respectively. On competition and its compliance, we improved our system and control of authorizations as well as provided more legal and compliance training. We prohibited any use of exclusive partnership and are firmly against it. Going forward, we will pay more attention through service quality and technology innovation. We should also work more closely with the merchants to jointly provide quality services to our consumers and forge win-win cooperation with the merchants. With regard to other aspects such as the food delivery courier welfare, data security, et cetera, we have improved our internal control mechanism and formulated a series of measures to protect the legitimate rise and interest of our merchants, consumers and couriers in accordance with relevant laws, regulations and policies. We have conducted the checks on antitrust risk for all of our businesses. Going forward, we will continue to conduct in-depth self-inspection according to the administrative guidance. All of our new business decisions are required to pass antitrust assessment and we will insist on strict antitrust compliance for all of our operations. On the financial impact, total fine by SAMR was RMB 3.4 billion and are accounted in other losses net this quarter. We have excluded the financial impact of the fines in our non-IFRS disclosure. In addition, we have refunded the exclusive partnership deposit to merchants, which had a limited impact on our balance sheet and does not impact our income statement. That's all. Thank you.

[Operator]

The next question comes from the line of [ Ya Jiang ] Gang from Pacific.

[Unknown Analyst]

My question is regarding Meituan Instashopping business. What do you think of the long-term prospects for this business? And how should we expect its profitability level? And also, I noticed that other players have recently upgraded this strategy on their [ portfolio]. How do we see our competitive advantages and future strategy?

[Xing Wang, executive]

Thank you for the question. A few factors drive the consumers' needs for on-demand delivery, such as digitization, organization and the wider reach of on-demand delivery network. Actually, I think the food delivery, with its 30 minutes delivery services have educated Chinese consumer of this very efficient and convenient lifestyle. We believe going forward, consumption habits may gradually shift towards on-demand retail. And the retail trends may evolve from everything-in-store to everything-now, and we hope Meituan could be an everything-now brand. We will develop both the supply and demand side to help us achieve this growth. On the supply side, given the more moderate off-line retail growth or more brands across different categories and more offline retailers start to embrace the on-demand retail distribution. We also see new brands created in an on-demand network. We hope to help with more and more brands and retailers to digitize their business and operate more efficiently on our platform. We will launch more projects, for example, assisting 100 brands to realize more than RMB 1 billion GTV in the next 5 years [Foreign Language] and collaborating with 10,000 supermarkets, enhanced, in 100 cities to operate better digitally. On the demand side, we are delighted to see the stronger consumer mind share for on-demand repair as product category expanded from fresh produce to flowers, medicines, snacks, electronic products, pet products, and more. Consumption scenarios also widened from addressing urgent needs to more regular routine purchase as product categories continue to diversify. We think that in the long term, most of food delivery users will be able to convert it into Meituan Instashopping users. Our food-delivery business have proved the profitability capability. Meituan Instashopping, in natural, extension of our on-demand delivery services from food to other categories, has the potential to achieve higher AOV. We also think it has good advertising potential for monetization. Hence, we are very confident about Meituan Instashopping, economic pension in the long term. Similar to our food delivery strategy, we believe quality growth on scale is more important than profitability in the short term on Meituan instant shopping. We will continue to develop structurally important categories to drive the long-term industry growth. On competition, we did notice that smaller players are joined into the on-demand repaying, which, we think, is a good thing, is demonstrating the potential of this industry. And we think the investment by different players together will reinforce the long-term potential of this market. And we are very confident on Meituan's advantages. First, we have built one of the largest on-demand delivery network and established a very strong consumer mind share for quick on-demand delivery services. And we also have the largest merchant and the most diversified category offerings developed over several years with very strong nationwide business development capability. Our merchant base increasing, not only in the large supermarket, also much wider range of partners, including small to medium merchants. And we have built very good know-how and capability in serving these SMEs. Our services are available nationwide in different tier cities with richer consumer experience and product categories. So we are very confident that we are able to continue to build the mind share for Meituan and sell everything in our brand. Thank you.

[Operator]

The next question comes from the line of Jerry Liu from UBS.

[Yuan Liu, analyst]

Okay. Maybe I'll ask one on the in-store, hotel & travel business. There's been some industry-wide macro headwinds in the third quarter that we all saw, especially from the e-commerce platforms and as management mentioned earlier as well. But first, when I look at Meituan's in-store business in the third quarter, it still showed pretty good growth, better growth than peers. So the first part of the question is what drove that? And the second part of the question is how do we look at the fourth quarter and beyond? Management did mention, for example, in the food business, there could be some hedges. So how does that look for the in-store business?

[Xing Wang, executive]

Thank you, Jerry, for the question. Thank you for noting that our installed business revenue growing by 33% year-over-year. We are also very happy for this result. I think on a high level, we think the in-store business as a percentage of total local services in China, the penetration rate is still very, very low. I think that's the most important reason and driver for our continued very fast growth. And although both installed and food delivery have been affected by the COVID cases, we have seen that when the government is able to really have very effective control, the offline service consumption recover fast and our in-store business are able to benefit from its very fast recovery. Meanwhile, consumption activity during holidays, such as the mid-autumn festival and consumption, before national day holiday, remain more local service driven, such as dining, leisure and entertainment and parent trial activities. This is long-haul travels. Those travelers were in this coverage. And the Meituan is the go-to destination for local services benefiting from such train. We also think a very diversified offering of different categories, different products on our platform, it provides a very strong foundation for us to achieve a resilient growth under different macro environment. And particularly, the number of active advertising merchants maintained very steady growth when they're trying to recover and able to really getting more business from online when the flat business was -- is growing much slower. Resilient growth, our second segment also partially attribute to this very strong advertising revenue growth. Recently, there was a wider spread of COVID cases, which has impacted our segment since the beginning of October, and I expect to have meaningful impact on our revenue growth in Q4 and maybe Q1 next year. However, we believe that COVID control will become more effective and more routine and the impact may not last long. Still, we believe the second segment still has very long-term growth potential, given its very low online penetration ratio. And the current macro environment, we think, actually consumers could be more price sensitive, and we provide a very diversified offerings for consumer to buy coupons and packaged deals and to enjoy the local consumption. So this could actually be also an important driver for consumers who are looking for good deals to come from our platform. So we remain positive on the continued growth of the installed business. And also on the profit margin, we also have confidence that it will remain stable. And a few more sentences on hotel booking. Hotel & travel trial business are more heavily affected. We continue to leverage our competitive advantage in lower-tier markets and lower-star hotels to drive their steady domestic room night growth. We have also continued to collaborate with more high-star hotels and optimized high-star hotel supply and improve service experience by driving growth in high-star hotels as well. In addition, we will explore more diversified products such as cooperation with popular theme parks as well as packaged deals across our platform to further strengthen our cross-selling capabilities. Thank you.

[Operator]

The next question comes from the line of Kenneth Fong from Credit Suisse.

[K. Fong, analyst]

[Foreign Language] Congrats on the solid set of results. I have a question on Meituan Select. Could you please give us some updates on the Meituan Select business? Especially given that you have operated the community group e-commerce business for over a year now, have you done any sort of like a business review? If so, what aspect that are consistent with your original expectation and which ones are not? How should we see the Meituan Select's potential regarding like user categories, order volumes and the ultimate time for profit turnaround? And lastly, with our regulations and the change in the competitive landscape, how will you implement your strategies in the future?

[Xing Wang, executive]

Thank you, Kenny. Yes, you are right. It had to be more than 1 year now since we started the Meituan Select in last July. And as of end of this week, Meituan Select already operates nationwide, then continues to provide a convenient diverse value-for-money products to consumers. The regulatory environment had evolved since Q3, we treated compliance as a top priority, optimizing pricing strategy and focusing on user experience and our own long-term capability and developments. We put more focus on high-quality growth, improving operating efficiency while maintaining industry-leading business scale. We actively optimized various operating strategies and strengthened our capabilities. On a broader front, we continue to increase goods diversity and optimize category structure, improving the quality of our fresh produce. On the user front, we optimized operating strategy towards both regular and new users to further capture consumer mind share. On the logistics side, we further refined the management of the entire logistical train and optimized the warehouse layout, improving our operating efficiency well, ensuring high quality and timely delivery. We conduct ongoing review of Meituan Select and continue to iterate operations. We remain patient and confident on its long-term penetration and scale potential. I think competition has -- will become more rational under the new regulation environment. While the pace of its growth might be lower than our initial judgment on what market expected. We believe that it's constructive for the healthy industry development. After iterating our business model for over 1 year now, we will maintain our industry position in the first year again and focus more on high-quality growth rather than the speed of ramp-up in the short term. I would like to stress that retail is a very complicated business. We need to refine operations for different nodes of the retail value chain, which requires continuous enhancement of our long-term capability, especially to further strengthen our supply chain capability, iterate logistics solutions and refine operations. We are delighted to -- we are delighted that our operating efficiency improved as we grow at healthy and steady pace. With the goal of achieving high-quality growth in mind, we will continue to allocate resources more efficiently by refining our operation, improving product diversity and quality and ensuring stable procurement. With this, we are [ confident ] to improve user satisfaction, stickiness and transaction frequency, which will, in turn, provide stable volume growth. Again, for optimizing our operations and efficiency, we expect the unit economics to improve over the long run as well. Thank you.

[Operator]

Thank you. I would now like to hand the conference back to your speakers today for any closing remarks. Please go ahead. Thank you.

[Scarlett Xu, executive]

Okay. Thank you for joining our call. We look forward to speaking with everyone next quarter.

[Operator]

Thank you. This concludes our conference for today. Thank you for your participation. You may all disconnect your lines now. Thank you.