This feature was made to replace an earlier Edison movie, "Watermelon Eating Contest" (1896), which was so popular that the negatives had worn out. In remaking it, the idea was expanded and given additional detail. Yet for all that, and its intended light-hearted tone, it is still uncomfortable to watch.
Although the basic idea is still the same, and still relies on the same racial stereotype, this version was clearly given some extra attention when it was remade. There are four contestants instead of only two in the 1896 version, the movie is four times as long (the original lasted barely 30 seconds), and there is much more of a story this time. The technique is actually of rather good quality for its time, but the stereotyping is so prominent that it is still quite uncomfortable to watch.
Since it represents a considerable technical improvement on the original, in one sense you can see why audiences may have enjoyed it. But for today, it is (like its predecessor) a caution that later generations may well take a much different view of images or ideas that are considered acceptable and even entertaining in their own time.
If you have the Kino DVD collection of Edison movies, accompanying the 1905 feature "Watermelon Patch" there is some good commentary by Michele Wallace, in which she explains the origins of this and similar stereotypes, and indicates some of the lessons involved.