The era of drastic subsidy rollbacks has arrived, reshaping China’s e-commerce and retail sectors as businesses and consumers adapt to a new economic reality.
Subsidy Cuts Across Sectors
Subsidies are retreating across various sectors, including food delivery and home appliances. Meituan’s local commerce business turned profitable, posting a profit of 5.7 billion yuan in Q2, according to state and international reports. However, this came at the cost of a 4%-5% year-on-year drop in average daily food delivery order volume in September.
E-Commerce and Retail Adaptation
E-commerce platforms are cutting costs and focusing on profitability. China’s e-commerce sales (excluding services) only increased by 0.1% year-on-year in September, a significant slowdown from 2.2% in August. Retail businesses are adapting by increasing food delivery services, with Haidilao’s food delivery revenue in the first half of the year increasing by 121%.
Consumer Behavior Shift
Consumer sentiment is becoming more cautious, impacting overall sales. Luckin Coffee’s same-store sales of self-operated stores in Q2 fell by 5.3% year-on-year, marking the third consecutive quarter of decline. Cotti Coffee ended its ‘9.9-yuan for all products without limit’ campaign, raising prices to 10.9-16.9 yuan.
Long-Term Implications
The long-term effects of subsidies on market health and consumer behavior are being reevaluated. Home appliance sales decreased by 7.4% year-on-year in the first half of 2026, and retail sales of narrow-sense passenger cars in September 2026 dropped by 28.0% year-on-year. As the market enters a stage where ‘price cuts can no longer bring sales growth’, businesses are rethinking their strategies to focus on real demand and profitability.
The rollback of subsidies is not merely a financial adjustment but a reflection of deeper economic trends. In recent years, subsidies have been a significant driver of consumer behavior, often distorting market dynamics by creating demand that might not have existed otherwise. This was particularly evident in the food delivery sector, where platforms like Meituan, Taobao Flash Purchase, and JD.com engaged in intense subsidy wars, driving up order volumes artificially. However, as these subsidies recede, the market is revealing its true contours, with consumers and businesses alike adjusting to a more sustainable, albeit less exuberant, economic environment.
For consumers, the shift is palpable. The days of large discounts and coupons are waning, leading to a more cautious spending mindset. This is evident in the decline of sales for brands like Luckin Coffee and the reluctance of consumers to return to pre-subsidy prices, as seen with Cotti Coffee’s price adjustments. The psychological impact of prolonged subsidy-driven pricing is significant, making it challenging for businesses to revert to higher price points without affecting sales volumes.
Businesses, particularly in the e-commerce and retail sectors, are responding by reevaluating their cost structures and focusing on profitability over scale. Meituan’s strategic shift from loss-making orders to profitable ones is emblematic of this trend. Similarly, large chain catering enterprises are expanding their food delivery services, though this shift has come at the expense of overall gross profit margins, as dine-in services typically yield higher returns.
The broader economic context underscores the necessity of these changes. China’s GDP grew by 4.6% in the first three quarters of 2026, but consumption growth lagged at 1.1%, and investment declined by 7.2%. Household deposits increased by 9.39 trillion yuan, while loans decreased by 1.03 trillion yuan, indicating a cautious approach to spending and borrowing. Housing prices in large and medium-sized cities have fallen by over 40% in the past five years, further dampening consumer confidence.
Historically, subsidies have been a tool to stimulate consumption and support specific industries, particularly during economic downturns. However, their prolonged use can lead to market distortions and unsustainable business models. The current rollback is a corrective measure, aiming to restore market health by aligning supply and demand with real economic fundamentals rather than artificial incentives.
The social implications of these changes are also noteworthy. Small merchants, who often bore a significant portion of the subsidy burden during the subsidy wars, are now facing the challenge of maintaining profitability without the crutch of platform subsidies. According to Lixin Consulting, 80% of catering merchants saw a decline in net profit, with 35% experiencing a drop of more than 30%. This highlights the uneven impact of subsidy rollbacks, with smaller players often bearing the brunt of the adjustment.
Looking ahead, the path to recovery will be gradual. Low prices will persist, but profitability will become increasingly elusive. Price increases will be a survival strategy for some companies, but their success will depend on consumer acceptance and broader economic conditions. Ultimately, healthy consumption will hinge on the recovery of income, employment, and balance sheets, which remain under pressure.
As China navigates this transition, the lessons from the subsidy era are clear: while subsidies can provide short-term stimulus, their long-term sustainability depends on their ability to cultivate genuine demand rather than distort it. The current rollback is a step toward a more balanced and resilient economic model, one that prioritizes real value over artificial growth.
The retail sales of narrow-sense passenger cars in September 2026 was 16.18 million units, down 28.0% year-on-year, according to the China Passenger Car Association.
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Photo: USDAgov (Public domain)
