China’s internet giants investing in offline retail for growth

Firms adopt an online-offline partnership strategy to combat soft retail spending

PUBLISHED : Tuesday, 22 December, 2015, 12:22pm
UPDATED : Tuesday, 22 December, 2015, 12:22pm

Alibaba’s purchase of certain media properties has dominated recent headlines, but China’s acquisition-hungry internet giants have moved on plenty of other targets lately, including brick-and-mortar retailers as they expand their commercial ecosystems.

The triumvirate of Baidu, Alibaba and Tencent has made US$75 billion of investments in strategic partners since 2013, according to HSBC data, and analysts say China’s internet behemoths have the cash to keep on going.

“[Mergers and acquisitions] will remain a main feature of China’s internet industry in 2016. We expect Alibaba’s and Tencent’s M&A spend to remain high,” wrote Fitch analyst Kelvin Ho in a recent note.

The internet firms aren’t just gobbling up other online players. Some US$47 billion has been spent on physical retailers and another US$797 million on logistic providers. Analysts say this reflects the broad adoption of an online-to-offline, or “O2O”, strategy.

“O2O has become the new growth driver for internet companies, especially e-commerce companies, which have been making efforts to broaden their services and product offerings and to enhance shopping experiences for online shoppers,” HSBC analysts wrote in a report last month.

Physical distribution capabilities have been on Alibaba’s shopping list. Its partnership with Haier Electronics Group two years ago strengthened its ability to fulfil white goods, and its August investment in Suning Commerce Group is expected do likewise for consumer electronics.

Competitor already has delivery capabilities, so its focus is on investing to broaden its product portfolio, by partnering with local supermarkets, convenience stores and pharmaceutical chains. In August it boosted its fresh food business by taking a stake in supermarket chain Yonghui Superstores.

The impetus for these moves comes from surging online retail sales, which grew at a 57 per cent compound annual growth rate from 2010 to 2014, easily outpacing the 13.7 per cent rate for all retail, as sales from physical outlets were cannibalised.

“The cashed up internet companies are definitely doing a land grab, in terms of O2O and other assets,” said Chi Tsang, head of Asia internet equity research at HSBC.

But despite the growth of online retail, it contributed just 11 per cent of all retail sales in 2014. And although it’s expected to grow at a CAGR of 27 per cent up to 2018, according to iResearch, HSBC figures show year-on-year growth is actually decelerating, from 49 per cent in 2014 to 39 per cent in the first half of this year.

In this context, analysts say it’s critical for the online and offline sides of an O2O partnership to see mutual benefit.

“By tying up with internet companies, offline retailers can benefit from getting access to their partners’ large online user base, and can better utilise their retail infrastructure (logistics supply chain and store network) by helping online retailers to provide an omni-channel shopping experience to their customers,” HSBC analysts wrote.

“Conversely, internet companies can further enlarge their market shares by digitalising offline partner’s product offerings and providing just-in-time services to users by utilising offline partners’ retail infrastructure.”

As an example, Alibaba’s deal with department store operator Intime Retail Group has spawned the Girlfriend Circle programme, which promotes social spending among more than 100,000 members, and the Miao Jie app, which has boosted conversion rates by channelling department store activity for over half a million users.

“I think of O2O as tapping into the other 90 per cent of retail sales that is not served via online shopping. Nine hundred million people have computers – smartphones – in their pockets so they are already enabled. Just need to supply them with services and payment options,” Tsang said.

Some O2O strategies don’t involve physical infrastructure or retail premises. Baidu is focused on mobile marketing and services transactions, having invested in online travel agency Ctrip and transport provider Uber. It also targets high-frequency consumer transactions like food takeout and movie ticketing.

Other players, like consumer electronics giant Gome and grocery retailer Sun Art, are taking a solo approach to combining physical retail and e-commerce. Future partnerships with those firms are possible, although smaller operators like Golden Eagle Retail Group, Wumart Stores or Lianhua Supermarket Holdings could be easier for the big three to swallow.

“The pure O2O land grab is nearly over, with, Didi and even 58 Home spoken for. But might there might be more retailers or hypermarkets interested in cooperating,” Tsang said.