Alibaba intensifies China retail rivalry with Tencent on back of US$3.6bil Sun Art deal

Alibaba’s move to take control of hypermarket operator Sun Art is expected to push forward its ‘new retail’ strategy in China. The stakes are high for Alibaba amid predictions that China will soon edge out the United States as the world’s largest retail market. — SCMP

Alibaba Group Holding’s recent US$3.6bil (RM14.92bil) deal to take control of Sun Art Retail Group, China’s largest hypermarket operator, has intensified its competition with Tencent Holdings to transform the country’s vast trillion-dollar retail market.

“The race to digitise retail in China is a two-horse race [between Alibaba and Tencent], and Tencent is actually further along,” said Jordan Berke, founder and chief executive of Tomorrow Retail Consulting. “Many national retailers have affiliated themselves with Tencent, and that has created a disadvantage for Alibaba.”

Alibaba, which runs the world’s biggest e-commerce platform, on Monday moved to bridge that gap with a transaction that doubles its stake in Hong Kong-listed Sun Art to 72%. Alibaba, parent company of the South China Morning Post, agreed to buy a 70.9% stake in A-RT Retail Holdings, which owns 51% of Sun Art.

“The increased stake in Sun Art is... a natural step for Alibaba because it needs more physical locations to be able to achieve its ‘new retail’ vision,” said Berke, whose company works with the likes of Walmart, Sam’s Club and Tencent.

The stakes are high for Alibaba amid predictions that China will soon edge out the United States as the world’s largest retail market. China is forecast to record US$5.1 trillion (RM21.13 trillion) in retail sales this year, compared with US$4.9 trillion (RM20.30 trillion) in the US, according to research firm eMarketer.

China’s economy grew by 4.9% in the third quarter compared with a year ago, accelerating from 3.2% growth in the second quarter, the National Bureau of Statistics announced on Monday.

Online penetration in China’s retail market, however, remains small at an estimated 23%, according to Jonathan Cheng, head of Bain & Co’s Greater China Retail practice.

“One of the main growth areas for Chinese tech companies and retailers is the 77% of the market [still transacting offline],” said Cheng, adding that the industry is closely looking at strategies to tackle that segment of the market.

Hangzhou-based Alibaba is banking on its new retail model, which integrates online and offline retail experiences for consumers, to expand its core retail operations in the world’s second-largest economy.

New retail is part of the “Five New” strategy initiated by Alibaba founder Jack Ma in 2016. This also includes new manufacturing, new finance, new technology and new energy.

“Alibaba’s strategic investment in Sun Art in 2017 was an important step in our new retail strategy,” said Daniel Zhang Yong, the e-commerce giant’s chairman and chief executive, in a statement on Monday.

In November 2017, Alibaba, Auchan Retail and Ruentex Group formed a strategic alliance to digitise and introduce new retail solutions at Sun Art stores, including omnichannel integration and a more personalised customer experience.

At present, all of Sun Art’s bricks-and-mortar stores in China have been integrated into Alibaba’s Taoxianda and Tmall Supermarket platforms, providing one-hour and half-day on-demand delivery through deep collaboration with other key businesses across the Alibaba ecosystem, including and smart logistics network Cainiao. As of June 30, Sun Art operated 481 hypermarkets and three mid-size supermarkets across the country.

Before the deal to take control of Sun Art, Alibaba established four years ago its own bricks-and-mortar grocery chain Freshippo, known as “Hema” in Chinese, which now has more than 200 stores located mostly in the country’s first and second-tier cities. Freshippo opened its first members-only store in Shanghai last month, putting it up against American members-only warehouse chain store Costco and Sam’s Club, Walmart’s wholesale division.

Alibaba’s Taoxianda offers online-offline retail integration services for fast-moving consumer goods and grocery retail partners with physical stores, including Sun Art. Online platform Tmall Supermarket offers consumers a broad range of daily necessities.

A person pushes a child in a shopping trolley past an RT-Mart hypermarket, operated by Sun Art Retail Group, in Shanghai, on October 19. Photo: Bloomberg

In 2017, Alibaba teamed up with the founder of Intime Retail (Group) Company to take the mainland shopping centre and department store chain operator private in a HK$19.8bil (RM10.58bil) cash transaction.

The e-commerce giant also invested in Red Star Macalline Group and Easyhome New Retail Group in May 2019 and March 2018, respectively. The two companies both operate retail chains for home-improvement supplies and furniture in China. Alibaba said the company has digitised more than 320 Red Star Macalline and Easyhome stores, according to its latest annual report.

“Tech firms like Alibaba have digital technologies, data insights and consumer understanding, but their weak spot is understanding how offline retail businesses work,” said Wang Xiaofeng, a senior analyst at tech research firm Forrester. “Partnerships and collaborations can improve the success rate of such digital transformation projects.”

Competition in that space is stiff, as Shenzhen-based Tencent has built up its presence in China’s fast-changing retail landscape.

Tencent, which runs the world’s largest video games business by revenue and China’s biggest social media super app WeChat, ratcheted up its challenge to Alibaba when it agreed to buy a 15% stake in online retailer in 2014.

It has also partnered with Shanghai-listed supermarket chain Yonghui Superstores, online fashion retailer Vipshop Holdings, Hunan-based supermarket and department store operator Bubugao Chain Supermarkets, and French grocer Carrefour before it sold a majority 80% stake in its China-based business to Chinese retailer Suning last year. In 2018, Tencent made a 34bil yuan (RM21.19bil) investment in retail operator Wanda Commercial Properties, which operates 235 Wanda Plazas in China.

Tencent-backed, meanwhile, has also been involved with traditional bricks-and-mortar retailers. US retail giant Walmart has been working with since 2016 to integrate its platform, supply chain and customer resources with the Beijing-based e-commerce firm. Last year, launched a programme that will add 175 Walmart hypermarkets to its supply chain and enable these offline channels to directly make deliveries of orders to customers.

Bain & Co’s Cheng said he expects to see “more of these partnerships between online companies and offline retailers” as a way for them to meet a potential decrease in sales amid changes in people’s buying behaviour.

“These [online] ecosystem players need the offline retailers to tackle the rest of the market [which have not adopted e-commerce],” Cheng said. – South China Morning Post

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