On October 8, China’s State Administration for Market Regulation (SAMR) issued an administrative decision (link in Chinese) relating to certain anti-competitive practices by Meituan, a leading online food delivery company. The investigation started in April 2021 and resulted in a finding that Meituan had abused its market dominance. The penalties include a fine of 3.442 billion yuan (approximately 533.7 million USD) and rectification of business practices. Meituan will have to report on its compliance to the SAMR for the next three years. This piece summarizes the main findings of the SAMR decision, focusing on several issues: The relevant market; market dominance; abuse of market dominance through anti-competitive practices; impact of the abuse; and penalties.

Relevant market

According to the decision, the relevant market is defined as the online food delivery platform service (OFDPS) market. These services are usually provided by online food delivery platform operators to catering businesses and consumers for food ordering and delivery. Specific examples of such services include information display, marketing promotion, search function, ordering process, dispatch arrangement and scheduling, payment method, reviews, and after-sales supports.

The geographical area of the relevant market is China.

Market dominance

Pursuant to Articles 18 and 19 of the Anti-Monopoly Law, the SAMR determined that Meituan has a dominant position in China’s domestic OFDPS market based on the following findings:

• Meituan’s market share exceeds 50 percent of the relevant domestic market. Based on its income, Meituan’s market share in the relevant market was 67.3%, 69.5% and 70.7% in 2018, 2019 and 2020, respectively. Based on order volume, Meituan’s market share was 62.4%, 64.3% and 68.5% in 2018, 2019 and 2020, respectively.
• The market is highly concentrated, as the Herfindahl-Hirschman Index of the OFDPS market was 5543, 5753, and 5854 for 2018, 2019, and 2020, respectively. The Concentration Ratio was 99.16, 99.92, and 99.98 for the three years.
• Meituan had relatively strong market power, because it has a stronger ability to determine pricing when negotiating with catering businesses; it can control the website traffic for businesses on the platform; it can control the sales channels of businesses on the platform.
• Meituan had relatively strong financial resources and advanced technical capabilities, which strengthened its market position.
• Other businesses are highly dependent on Meituan, which has made it more difficult for these businesses to leave Meituan platforms.
• It is difficult to enter the relevant market because the cost of building an online food delivery platform to handle the data, algorithm, dispatch system as well as promotion and R&D is high, and it is hard for new entrants to reach a critical scale to effectively enter the market.
• Meituan consolidated and strengthened its market power through building an ecological network in sectors related to the online food delivery business, including brick and mortar catering, hotel, tourism, and travel. This has deepened the reliance on Meituan of businesses on the platform, and further consolidated and strengthened its market power.

Abuse of market dominance

The SAMR then identified three types of practices used by Meituan, through which it restricted businesses on the platform from partnering with competing platforms.

The SAMR found that Meituan took multiple measures to push for exclusive cooperation agreements with businesses using its platform. These agreements usually come with language that would, among other things, require the businesses to "put all online marketing resources and energy into the Meituan platform", "only establish a strategic cooperative relationship with Meituan", "no longer have business cooperation with other network service platforms that are the same or similar to Meituan’s platform", or "only cooperate with Meituan and its subsidiary platforms."

To pressure catering businesses to sign the exclusive cooperation agreements, Meituan usually imposed a 5% - 7% higher commission rate and a higher level of guaranteed commission for businesses that do not sign the exclusive cooperation agreements. It also imposed discriminatory measures to disrupt the normal business operation of non-exclusive businesses, according to the decision.

Meituan also adopted multiple measures to systematically push for the adoption of “pick one out of two”, in order to exclude competitors and limit competition. These measures include taking the signing of exclusive agreements into consideration for employees’ performance evaluation, vigorously promoting "pick one out of two" in a specific time period and a specific area, increasing training for employees, and strengthening control over agents and partners through internal documents and exclusive agreements.

In addition, Meituan carried out multiple measures to ensure the implementation of “pick one out of two,” including developing systems to watch and punish businesses on the Meituan platform that work with competitive platforms, adopting punitive measures to force termination of such cooperation between businesses and third party platforms, and collecting deposits from exclusive businesses in case they violate the agreements later. The SAMR found that 1.63 million businesses had signed exclusive agreements with Meituan and the deposits totaled 1.29 trillion yuan (approximately 200 million USD).

Such behavior and practices violated Article 17 (1) (4) of the Anti-Monopoly Law, according to the decision. Article 17 states that “undertakings holding dominant market positions are prohibited from doing the following by abusing their dominant market positions … (4) without justifiable reasons, allowing their trading counterparts to make transactions exclusively with themselves or with the undertakings designated by them.”

Impact of excluding and limiting market competition

The SAMR further ruled that Meituan’s abuse of its market dominance excluded and limited competition in the OFDPS market, damaged the legitimate interests of the businesses on the platform, harmed the interests of consumers, and impeded the innovation of platforms.

In particular, Meituan’s practices excluded and limited competition in the OFDPS market because it limited fair competition between businesses on the platform and enhanced the barriers to entering the market.

Meituan’s practices damaged the legitimate interests of the businesses on the platform because it unreasonably restricts their free choice, impairs the fair competition environment and improperly harms the legitimate interests (including potential incomes) of the businesses.

Meituan’s practices harmed the interests of consumers because it reduces the choices of consumers, fails to provide consumers with the best price and services, and reduces their long-term benefit due to restricted competition.

Meituan’s practices impeded the innovation of platforms because it hinders the free flow of resources and mitigates innovation and development of the industry.

Penalties

As a result, SAMR ordered Meituan to:

• Stop restricting the cooperation of businesses on the Meituan platform with other competitive platforms.
• Fully refund the exclusive cooperation deposit of 1.289 billion yuan (approximately 200 million USD).
• Submit a report on its rectification of illegal activities to the SAMR within 15 days of the receipt of the administrative decision.
• Carry out comprehensive review and rectification of its business operations in accordance with the "Administrative Guidance" issued by the SAMR.
• Pay a fine of 3% of its domestic sales, which were 114.748 billion yuan in 2020, totaling 3.442 billion yuan (approximately 533.7 million USD), within 15 days after receiving the administrative decision.

The “Administrative Guidance” has 15 measures in four sections with which Meituan must comply. For example, it requires Meituan to conduct comprehensive and in-depth self-inspection of its business practices, and bring it into compliance with antitrust rules, including in relation to technology, platform provision, data and algorithm that would eliminate or restrict competition. It shall also protect the legal interests of all relevant parties, including businesses on the platform, consumers, and delivery personnel.  In addition, the Administrative Guidance requires Meituan to improve its internal supervision and management system to ensure compliance with the Anti-Monopoly Law. Lastly, it requires Meituan to ensure fair competition on the platform.

Meituan may appeal the SAMR decision within 60 days or file an administrative lawsuit in court within six months from the date of receipt of this administrative decision. However, the appeal or litigation will not suspend the implementation of the administrative decision.