Baidu's (NASDAQ:BIDU) biggest opportunity for growth is in what it calls transaction services (TS) -- formerly known as online to offline (O2O) -- and improving restaurant food delivery looks to be its next investment in this area.
Is food delivery a ticket for growth?
Reports indicate that Baidu wants to raise upward of $500 million to grow its online food ordering service, Baidu Takeout Delivery. As of October 2015, the site boasted 16 million users, including 11 million monthly mobile active users in 109 cities, according to Investor's Business Daily. Baidu is looking to expand its marketing presence and improve the overall quality of the platform.
Management says that gross merchandise volume (GMV) for Baidu Takeout nearly tripled quarter over quarter, with the highest average revenue per user (ARPU) among its peer group, according to the Q3 2015 earnings call. This is not a one-quarter trend, as Takeout has grown GMV more than 12-fold year over year. Growth looks to continue at a rapid pace. Baidu reportedly expects Takeout GMV of $1.2 billion in 2015 and $3.8 billion in 2016. Reading about CEO Robin Li's take on the total addressable market for TS in China leads me to believe that this type of growth is just the tip of the iceberg.
Isn't this a search company?
Baidu is a search company, but Li believes that the market for TS dwarfs the online search market in China. "O2O opens our total addressable market in China by a factor of more than 10 to a RMB 10 trillion [about $1.5 trillion] opportunity," he said in a July earnings call. Baidu will continue to grow its search business domestically and abroad, but TS should eventually become the most important contributor to the company's bottom line. Baidu currently has a market cap around $60 billion and trailing-12-month revenue of $9.47 billion. It's easy to see why Li is so excited about the potential for Takeout as a multibillion-dollar opportunity on its own, but also as part of a larger trillion-dollar TS opportunity. Capturing even 1% of a $1.5 trillion market would mean $15 billion in annual sales.
Takeout fits in with other TS
Growing Takeout will help Baidu grow other elements of its TS platform such as Maps, through which Uber drivers can be hailed; Nuomi, which connects users to brick-and-mortar stores through an app; and Wallet, which is the company's payment services offering. Baidu is attempting to perform the functions of a number of U.S. companies all at once. Whereas I use Grubhub (NYSE:GRUB) for food delivery, Groupon (NASDAQ:GRPN) for online deals from physical merchants, Fandango to buy movie tickets on my phone, and Paypal (NASDAQ:PYPL) for frictionless payments, Baidu is offering all of these services and more under one umbrella.
There are benefits to the customer in having all of these services linked together. If you order a lot of vegetarian food delivered to your house, the daily deals site will know to avoid showing you offerings for the new local steakhouse. There are also benefits to the local merchants, who will have an easier time acquiring and retaining customers by having more information about their habits and tastes. The biggest benefits should accrue to Baidu. As the company's CFO explained in an October conference call:
Our gateway products of search and maps, our infrastructure products of Baidu Wallet, Baidu Connect and Local Express, and our Transaction Services product of Nuomi and Takeout Delivery will all build upon each other and elevate the strengths of the Baidu platform in its entirety. We look forward to executing on our plan, and sharing the progress with the investment community.
Baidu could have chosen to rest on its laurels as the dominant search provider in China, continue to generate billions in revenue, and grow as both the overall population and percentage of Chinese Internet users increases. CEO Robin Li sees a more compelling opportunity and is choosing to forgo maximum short-term profitability by investing in opportunities that may yield tremendous long-term gains. Baidu Takeout is a big part of this future equation, and I look forward to seeing how the story plays out.