China’s internet behemoth Alibaba is spending Rmb28.3 billion ($4.63 billion) for a 19.99% stake in Suning Commerce Group, a conventional consumer electronics retailer, extending the e-commerce giant’s strategy of taking equity in brick-and-mortar stores to strengthen its online retail business.
At the same time, Nanjing-based Suning will deploy about Rmb14 billion ($2.28 billion) to buy 27.8 million new shares of Alibaba, representing a 1.1% stake in the Jack Ma-controlled company.
When the deal is done, Alibaba will be the second biggest shareholder of Suning.
The strategic partnership between Alibaba and Suning underscores a growing trend towards the integration of online and offline retail operations, known as O2O commerce, as smartphone users seek on-the-ground locations to pick up purchases of items like movie tickets and food items bought online.
O2O is a popular concept in China, in part due to an undeveloped logistics network that strains to meet massive demand from the country's growing middle class. According to a McKinsey survey in February, some 71% of 687 digital consumers polled said they use O2O services.
“The consumers we surveyed are most eager to see offerings in three more O2O service categories: entertainment (61%), healthcare (47%), and housing/car services (42%),” Alan Lau, a senior partner with McKinsey, wrote in the report.
Alibaba's investment in Suning will be the company's biggest single share purchase since it raised a record-breaking $25 billion in an initial public offering on the New York Stock Exchange in September of 2014.
Ma's spiel
“This new alliance brings forth a new commerce model that fully integrates online and offline,” Jack Ma, executive chairman of Alibaba, said in a statement. “This alliance will benefit consumers and merchants by cultivating an open and transparent integrated ecosystem that will be the backbone of the future economy.”
Alibaba’s investment in Suning will be funded by internal resources, according to a person familiar with the deal, who declined to be named because the transaction is still pending regulatory approval.
“By exploring standards and models in the O2O sector, we hope to bring real benefits to Chinese consumers,” said Sun Weimin, vice-chairman at Shanghai-listed Suning, which will open a flagship store on Alibaba’s Tmall.com, a business-to-consumer shopping site that allows brands to sell their goods directly to consumers in China.
As part of the deal announced on Monday, Suning will also become a partner of Alibaba’s logistic company Cainiao, which covers a combined 2,800 counties and districts in China. The joint effort is expected to cut delivery times from two to three days to under two hours.
“Consumers will be able to have a physical experience with the product in-store, while at the same time being able to operate other areas though their mobile devices,” the companies said in a joint statement.
Piling on
Joining the efforts to develop O2O services, China’s dominant search engine Baidu said in late June it would invest Rmb20 billion in the next three years in O2O services.
Tencent, another internet powerhouse on the mainland, is also investing heavily in so-called consumer-facing services. Hong Kong-listed Tencent owns the popular social networking app WeChat and instant messenger service QQ.
In spite of the fierce price war in China’s O2O business, market insiders says Baidu has been positioned in the right territory, as the opportunity is enormous thanks to the country's densely-populated cities and growing middle class.
According to an HSBC estimate, the Chinese O2O market is [worth] Rmb10 trillion and will continue to grow following its “very strong initial success”.
The investment in Suning will be the second bricks-and-mortar deal for Alibaba after the Hangzhou-based company bought a 25% stake in department store operator Intime Retail for $692 million in March of 2014.
Big spender
Alibaba shares have dropped more than 25% this year, compared with only slight movement on the benchmark S&P 500 Index -- a situation that is highlighting concerns over a slowdown in the growth of online sales and questions about the strategy of connecting online users with offline services ranging from taxi-hailing apps to restaurant booking sites.
“Alibaba has to reach [more] offline customers.” Wang Guanxiong, a tech expert and former software director with Alibaba, told FinanceAsia.
“The move fits Alibaba’s strategic development,” said Wang. “We’re going to see more and more Internet giants buy shares in brick-and mortar retail shops/brands in the near future.”
Since its US listing, Alibaba has deployed nearly $6 billion in 15 deals, snapping up technology and online retail companies from Singapore to Israel, as well as those in the US and China, according to data provider Dealogic.
On August 4th Alibaba announced the appointment of Michael Evans as the company's president, overseeing international expansion. Evans, a gold medallist rower at the 1984 Olympic Games, was a partner at Goldman Sachs for 20 years. He left the US investment bank in 2014 after serving as vice-chairman, as well as chairman of Asia.
Alibaba will announce its quarterly results to June on Wednesday.
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