Alibaba Group’s purchase of a 36% stake in one of China’s biggest hypermarket operators for $2.88 billion highlights the value of data and scale in food shopping.
The internet firm was willing to pay 18.8 times 2017 earnings for the bricks-and-mortar network of Sun Art Retail Group because it sees physical stores as a stepping stone to becoming the e-commerce grocer to China’s internet savvy 1.3 billion consumers.
“Physical stores serve an indispensable role during the consumer journey, and should be enhanced through data-driven technology and personalised services in the digital economy,” Daniel Zhang, Alibaba’s chief executive officer, said in a statement on Monday.
The ability to deliver perishable goods fast and adapting quickly to changing appetites will give it an enviable edge in China’s $500 billion food retail market. Alibaba hoovers up data on consumers who use the various parts of its ecosystem and analyses it to understand their preferences.
Alibaba’s wholly owned unit Taobao marketplace is looking to leverage these massive repositories of data to help the megastore owner improve inventory management, integrate online and offline data, enhance the in-store consumer experience and make the last-mile logistics more efficient.
It bought Sun Art from the Taiwanese conglomerate, Ruentex, which had seen the writing on the wall in China some time ago. Ruentex had been talking to other interested buyers and found in Alibaba a partner that could help Sun Art adapt to the new market reality.
While Ruentex is a conglomerate and has business interests ranging from financial services to property, Sun Art’s largest shareholder and established retailer, France’s Auchan Retail, has no choice but to grapple with the disruption of its industry.
Auchan is increasing its stake in Sun Art to 36.18% and will remain its largest shareholder. Meanwhile Taobao will hold 36.16%. Ruentex’s stake in Sun Art will fall to 4.67% from 41.3%, the three companies said in a statement on Monday.
Ruentex will sell 26.02% of its direct Sun Art ownership, valued at $2.07 billion, and another 10.14% of indirect ownership in Sun Art, valued at $807 million, to Taobao.
A price of HK$6.5 per Sun Art share represents 18.8 times 2017 price to earnings. This compares with A-share China food retailers who are trading at a median of 58 times and global food retailers trading at 15.2 times.
Offline/online expertiments
Taobao and Auchan are by no means the first to look at online offline delivery of fast-moving consumer goods. Many have been exploring the right combination.
Walmart had been struggling to build scale in its China business, but after allowing shoppers to buy its products on Chinese ecommerce firm JD.com’s platform in 2016 it generated billions of dollars of revenue over a short time period.
The US company expanded its joint venture with JD.com in July. When a customer places an order on JD.com, its order management system analyzes data from both companies' stock systems to determine which warehouse or store is closer to the customer, and dispatch a courier accordingly.
Elsewhere, Amazon bought Whole Foods for $13.7 billion earlier this year.
Alibaba’s ambitions
The acquisition of a stake in Sun Art gives a major fillip to Alibaba’s desire to grow in the fast-moving consumer goods segment and follows its investments in Intime, Bailian, San Jiang and Hema.
Sun Art operates 490 multi-format stores across 224 cities in China.
Alibaba can also bring other parts of its group to bear to make its investment pay off. Alipay would benefit from the increase of Alibaba’s transaction volume and a big part of the offline purchases.
Alibaba is looking to join up the physical, offline world with its online capabilities in two other major retail segments. Alibaba has already strengthened its market share in clothing and is also looking to grow in the sale of electronics online.
Citi is the exclusive financial advisor to Ruentex while CICC is giving financial advise to Alibaba. Law firm Skadden is advising Auchan.
While it may look like Alibaba is paying a hefty price for an Old Skool shopping network, consumer habits and the Big tech firms that are molding them in China are often harbingers of change elsewhere in the world.
