Alibaba has taken a further step into new retail, its bid to fuse ecommerce and physical stores, splashing out $2.9bn for a stake in one of China’s biggest supermarket chains.
The HK$22.4bn (US$2.9bn) deal, which initially sees Alibaba acquire an aggregate direct and indirect 36.16 per cent slice of Sun Art Retail Group, triggers a mandatory takeover offer under Hong Kong rules as the Chinese ecommerce group is acting together with fellow Sun Art shareholders Auchan Retail of France and Taiwan’s Ruentex Group.
However, the lowball price suggests the chances of take-up are slim. Alibaba is offering HK$6.50 a share, a 24 per cent discount to Friday’s close of HK$8.60 — a differential that sent Sun Art shares down as much as 13.6 per cent on Monday before they closed down 4.1 per cent at HK$8.25.
Sun Art is one of the few Chinese retailers with a nationwide footprint — the other one, Yonghui Superstores, is part-owned by Alibaba’s ecommerce rival JD.com — and boasts nearly 500 stores.
Daniel Zhang, Alibaba’s chief executive, hailed the move as one “to redefine traditional retail through digital transformation”. Analysts said it does so on a very different model from that pursued by Amazon, which this year paid $13.7bn for Whole Foods.
“There is a revolution under way in China, where offline retail does not stand as a defender, victim or loser but most often, as a partner to ecommerce,” wrote Bhavtosh Vajpayee, analyst at Bernstein Research, in a note to clients.
“This ‘digitisation of retail’ is being catalysed by Alibaba and JD at a speed probably only China can afford — the world’s largest commerce market and its largest pool of internet savvy consumers also have vastly under-developed offline infrastructure.”
Richard Windsor, analyst at independent research Radio Free Mobile, noted that while its Whole Foods acquisition was about giving Amazon “enough volume in perishable items to give it the scale to push more and more groceries through its site”, Alibaba in contrast “is doing something very different in making a play to take a big piece of the Chinese offline market”.
Tom Birtwhistle, consulting director at PwC Consulting in Hong Kong, said China’s internet players were stealing a march on incumbent retailers by tackling the huge back-end problems, such as supply chain, logistics and wastage, rather than following the typical customer-centric route taken by retailers to concentrate on ecommerce and marketing.
China’s $1.3tn grocery market is ripe for a shake-up. It is big but highly fragmented, with even the leading players each holding only a small slice.
“It’s an enormous market with enormous challenges,” said Mr Birtwhistle. “If I’m an internet company these are the crosshairs I’m looking at because that’s where I can play and generate significant value.”
Alibaba said the price paid for Sun Art represented a premium of 150 per cent to net asset value as at end-June. Even the supermarkets that are profitable in China tend to have low valuations, reflecting the challenging nature of the business.