Food Delivery Industry in China [Part 2]: From Algorithms to Sustainability

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  • Food Delivery Industry in China [Part 2]: From Algorithms to Sustainability

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    Two months ago, a controversial report in Renwu magazine reported systemic exploitation of food delivery workers, also known as couriers, or riders. This occurred through built-in algorithms that companies such as Meituan [3690:HK] and Ele.me use, triggering widespread online outrage.

    To learn more about the mixed business model and material ESG issues for the food delivery industry, please read Food Delivery Industry in China Part I: Outrage at the System.

    The balance between efficiency and fairness

    In contrast with the US, China’s food delivery industry boom has been catalyzed by low delivery fees from substantial subsidies and aggressive marketing. These factors have allowed China’s food delivery industry to grow three times larger than that of the US, while keeping its delivery costs at around 10% to 20% of US averages.

    Currently, most of these food delivery internet giants have taken cost saving measures at the expense of human capital. Taking Meituan as an example, its 1H20 financial report showed food delivery revenue grew 2.1% over the last year, but its operational profit increased by 96.4%. Also, its operating margin turned positive to 8.6%, growing from a negative 0.7% from 1Q to 2Q in 2020. Similarly, Ele.me announced that in 2Q, single orders began turning a profit with improvements in its efficiency for food delivery. However, as highlighted from SPDB International commentary, “the cost of riders decreased, and the profit of food delivery increased sharply.” This reflects that cost savings and consequently, profit growth, mainly came at the expense of increasing pressure on delivery riders.

    Couriers in the food delivery industry face more pressure to make deadlines than those in the logistics and express delivery industry. While some express delivery workers have fixed compensation, food delivery workers earn money by delivering orders on time. In its IPO prospectus in 2018, Meituan stated its riders generally made less than RMB7 per order, dropping from RMB10.3 in 2013, and the pay is still decreasing. What is more, it is believed the risks and rewards are unfairly allocated across the ecosystem.

    Delivery workers often face high accident rates, but they are also trapped in substandard pay levels that entail harsh delivery deadlines, penalties for overtime orders and lack of basic insurance. In China, efficiency and fairness are two main issues affecting income, and in the food delivery industry, it boils down to profit for the company versus labor protection of riders. Algorithms play a large role in improving efficiency for traditional food delivery. Machine learning, big data analysis as well as other means allow for intelligent scheduling and distribution. However, these internet platforms must also take into account the “human being” factor into their businesses. Algorithms may be the beginning of long-term enterprise lifecycles, but factoring in human capital such as laborers is important for company longevity and sustainability. 

    The road from algorithms to sustainability

    Because of rising demand for food delivery services, especially after the novel coronavirus outbreak at the beginning of this year, the sector absorbed a huge number of laborers in a very short time. In June this year, Meituan Research Institute issued its Employment Report of Meituan Riders during the Epidemic, stating that during the time period from January 20th to March 18th, the number for newly registered individuals for food delivery was 336,000. In this number, 18.6% of the new riders transferred from their jobs as factory worker, since many factories closed during COVID-19. During Wuhan’s citywide lockdown, these riders not only delivered food for doctors and other citizens, but also medical supplies. These individuals continued to work during the COVID-19 outbreak despite the health risks, and the number of such workers will continue to grow. The Ministry of Human Resources and Social Security estimated that the new sector will altogether employ 30 million people in the next five years. Currently, China’s RMB300 billion ($44 billion) food-delivery industry employs more than 6 million couriers, mostly young, male migrants from rural China.

    As giants in the food delivery industry, Meituan and Ele.me’s decisions have a big impact on the majority of delivery workers in the sector. Some believe supervision from a legal level can improve the situation for these workers and that algorithms cannot solely govern the moral boundaries of an enterprise. In order to restrict platform behavior, a third-party evaluation company can be introduced for supervision, and the government can participate and guide appropriately in this regard.

    In recent years, Meituan and Ele.me have made attempts to engage in social responsibility, and improve their ESG performance. From an environmental perspective, in 2017, Meituan Food Delivery launched its “Lushan Mountain Plan”, to offer solutions to environmental problems in the food delivery industry. Ele.com also launched a plan called “Blue Planet”, which called for reduction of single-use utensils.

    From a social perspective, Meituan stated in its 2019 Annual Report that there were 257,000 riders on its platform who came from lower income households listed in the national poverty registration system. Statistics showed that 253,000 out of the 257,000 delivery riders boosted their family income and no longer classified as below the poverty line. These numbers show that the poverty alleviation rate was as high as 98.4%. In addition, Meituan conducted exploration in consumption poverty alleviation, public welfare poverty alleviation, tourism poverty alleviation and other means to engage itself in community.

    Responding to the recent online outrage, Alibaba-backed Ele.me announced it would add a feature to its mobile app, allowing customers to grant several additional minutes for riders to deliver an order. More importantly, the company canceled overtime order penalties for riders. “The system is dead, but human beings are living,” Ele.me said in its statement. “Every hardworking individual deserves to be respected.” Meituan also vowed to add an eight-minute “buffer” so delivery workers can slow down in traffic, and said it planned to develop technology such as Bluetooth-linked helmets for riders to have hands-free communication while driving.

    Critics argue whether such measures the platforms have proposed actually solve the fundamental problem. Some netizens view Ele.me’s new feature as simply a shift in responsibility onto customers, to decide whether to give riders more time, than a systemic method to address the underlying issues of rider safety, and welfare. Others also added that once the riders receive an additional five or eight minutes, they would likely spend the time taking more orders rather than driving slowly or resting. Instead, the algorithm backing the ordering platforms should not only account for consumer demand but also factor in riders’ health and safety.

    For the time being, quick corporates responses towards public backlash to these social problems indicate the potential for companies to incorporate better policies for worker welfare into their businesses. Even though these platforms still have no signed labor contracts with riders, enterprises this large still shoulder a certain social responsibility to the many lives they affect. Alternatively, they could consider offering delivery workers using their platform basic benefits such as better working conditions, a minimum wage, as well as accident insurance.

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