Shanghai authorities crack down on O2O food delivery apps

O2O delivery has absolutely exploded in China over the past couple of years, giving rise to powerful new startups like Ele.me as well as attracting big players like Baidu and Meituan to the growing market. It’s not difficult to see why; O2O food is a win for everyone. Restaurants get access to more customers with no need for additional seating space, and customers get the food they want delivered right to their doorstep.

But according to the Shanghai State Food and Drug Administration (SFDA), some of China’s O2O food players have been getting a little lax with their standards. A recent investigation found that numerous platforms, including Ele.me, Meituan, and Dianping, had listings with problems like:

• Not displaying the seller’s food service permit
• Listing permits with addresses that led to unlicensed food sellers
• Listing borrowed permits (permits with the name and address of a different food provider than the actual source of the food)
• Listing forged permits (permits with a fake business name and address for the food provider)

The platforms have been ordered to clean up their act and immediately delist any products sourced by unlicensed food operators. The SFDA is also investigating for criminal wrongdoing and may levy fines of RMB 50,000 to RMB 200,000 (US$7,800 to $30,000).

This might seem like a minor issue, but food sourcing is a real concern in China, where food safety can be a problem. High profile cases have died down in comparison to a few years ago, when scandals were flying so thick and fast that a Fudan University student started what became a very popular website to keep track of them all. But issues remain. For example, just a couple of months ago Hebei officials issued a forced recall order after a Chinese company’s milk products were found to contain illegally high levels of sodium sulfocyanate.

The SFDA’s investigation itself doesn’t really pose any threat to companies like Ele.me or Meituan. Ele.me, after all, just raised US$630 million – it can probably afford quite a few US$30,000 fines.

But even the most well-funded companies do have to be afraid of a public food safety scandal. Delivering an order of unsafe food that ends up seriously poisoning a large group of people, for example, is the kind of scandal that could blow up and threaten the company’s core business. A worst case scenario could destroy the company outright: Sanlu was one of China’s biggest and proudest dairy product makers before the 2008 melamine scandal destroyed it so completely that it went defunct.

Such an extreme case is unlikely in the O2O sector, of course. But even a smaller-scale scandal could have serious repercussions for a food delivery business. After all, if you saw on the news that Food Delivery Company A had just delivered a bunch of E. Coli-infected food to a local office recently, would you still order your lunch from them, or would you be switching to Food Delivery Company B instead? O2O delivery firms don’t produce their food, but if customers have doubts about their sourcing, they may well be inspired to switch delivery companies anyway.

Given that, it would be advisable for China’s O2O food delivery firms to follow the authorities and play by the book on this one. Requiring proper licenses – and checking to be sure they’re legit – might make the high-speed expansion that’s been a big part of O2O’s growth in China more difficult, but if that helps ensure customers are getting food prepared in properly licensed kitchens and not off-the-books back-alley spots with no SFDA oversight, it’s worth it.