Food Delivery Industry in China [Part 1]: Outrage at the System

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Food Delivery Industry in China [Part 1]: Outrage at the System

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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 use, triggering widespread online outrage.

According to the article, the riders are pushed by platform algorithms to meet tight deadlines. In 2019, the average delivery time of the industry was 10 minutes shorter than in 2017. Because couriers must either meet a harsh deadline for a timely delivery or face penalties, delivery workers are left with no choice but to break traffic rules as they race against time. This makes their jobs one of the most dangerous in China not just to themselves, but anyone they encounter on their delivery route.

In 2017, it was reported that in Shanghai, a serious injury or death involving a delivery driver occurred every 2.5 days. And in September 2018, over half of the 2,000 traffic violations in Guangzhou were committed by riders from Meituan and

Besides time pressure, other factors adding to the pressure on delivery workers are still embedded in the platforms’ algorithms. For example, customers can rate riders but not vice versa. Because ratings are closely connected to monthly wages, at times, riders have to contend with unreasonable customer demands, such as buying cigarettes or taking out trash for customers to protect themselves from negative ratings.

Mixed business models used by food delivery platform

China’s food delivery platforms are typical examples of mixed business models. Meituan, with a market share of 64.6% according to the Data Center of the China Internet (DCCI) 2019, adopted a mixed approach of combining different models, starting from self-operation in the early stage, but then transferring to two main models: franchising or crowdsourcing.

With respect to franchising, Meituan attracts independent, fast-delivery companies or individuals to set up teams and provide delivery services. Franchisees are responsible for their own profits and losses after paying the franchise fees. However, Meituan provides the franchisees with subsidies, technical support, training, and delivery-related materials (thermos containers, uniforms, etc.). In this model, riders sign a labor contract with the franchisees rather than Meituan.

As to crowdsourcing, Meituan has established its own crowdsourcing logistics platform, Meituan Outsourcing. The platform attracts a large number of individuals working part-time to provide food-delivery services. These individuals do not have a labor contract with the platform either.

In addition, large chain stores, such as KFC and McDonald’s, that are on the Meituan food-delivery platform, directly recruit their own delivery workers. While they contract out some of their food delivery services, most of the directly hired workers have labor contracts with these restaurants as opposed to internet platforms.

According to China Daily, in the first half of 2020, around 3 million registered delivery workers received orders from Meituan’s platform. A working paper from International Labour Organization (ILO) showed crowdsourcing has thus become a major channel for attracting couriers onto the delivery platform, accounting for 60% of the total, while franchising accounts for about 40%.

At the end of the day, regardless of whether riders are working through a franchise or are crowdsourced, there is no labor employment relationship between riders and the delivery platform itself. Such workers that are contracted out through crowdsourcing or other methods are often termed ‘gig workers.’  In fact, in Meituan’s 2019 ESG report, rider safety was illustrated in the supply chain section, leaving it theoretically off the hook from such issues directly tied to its ESG performance.

Material ESG issues for the food delivery industry

According to a 2019 Bloomberg analysis, investors will see that the average ESG disclosure score for companies listed in Hong Kong is 36.5, compared with 32.4 in Shanghai. As a listed company with its IPO on the Hong Kong Exchange in 2018, Meituan received 30.2 for its ESG disclosure score, lower than the average for both HKEX and the SSE. The lower score mainly comes from poor information disclosure, which usually leads to a low ESG score.

For Meituan’s case, in regards to labor, ESG standards such as those from the Sustainability Accounting Standards Board (SASB) categorize such online food delivery companies as in the software and IT services industry. This means that within SASB’s materiality matrix, Labor Practice, which falls under the social pillar, is not considered financially material. However, recent studies on a concept called dynamic materiality suggest otherwise. Truvalue Labs define dynamic materiality as “every company, industry and sector has a unique materiality signature that evolves over time based on factors like emerging technologies and new regulations.”

Dynamic materiality suggests not just that Labor is becoming material for such delivery platforms, but that it commands prioritization relative to other ESG categories.

* Cohort includes the following companies: DoorDash, Just Eat / Takeaway, Meituan Dianping, Delivery Hero, Grubhub, Naspers. Important ESG-related events are originally called as spotlight events.

Source: Truvalue Labs (Wording such as spotlight events have been adjusted for clarity-sake)

In the US, Truevalue Labs assessed that online delivery platform DoorDash also faces a similar labor practice situation. In the graph above, Truevalue found that labor practice events among a cohort of delivery platforms, both positive and negative, came up the most out of any other event type, including competitive behavior, or selling practices and product labeling. Such information highlights how relevant of a topic labor practices are for the food delivery industry.

In 2019, DoorDash pledged USD30 million to fund a ballot measure in California that would exempt contracted out workers from being classified as employees. The dynamic labeling of such workers as “independent contractors” who perform tasks for tech platforms, at times algorithmically controlled, instead of as “employees,” would thus allow the delivery platform to bypass typical labor regulations. They are thus able to leverage the benefits of such a large workforce, without the responsibility of providing for their basic employee needs.

To read on the situation in China, and possible paths companies have taken to address this situation, read Food Delivery Industry in China Part II: From Algorithms to Sustainability.


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