Alibaba Group Holdings Ltd. said Monday it has agreed to invest $692 million in Chinese department store operator Intime Retail in a bid to create “online to offline” retail opportunities.
Alibaba said it will buy a 9.9 percent equity stake in Intime for $214 million. The Web giant also said it will subscribe to $478 million worth of convertible bonds issued by Intime which, if converted, would translate to a stake of at least 25 percent in the company.
This is the latest in a string of acquisition deals for Alibaba, which is pursuing a highly anticipated initial public offering in the U.S. that could raise more than $15 billion. It is also another example of Chinese-led M&A activity targeting the fashion and retail industry as of late. As reported, Nanjing-based Sanpower Group is in talks to buy British department store retailer House of Fraser while Shenzhen Marisfrolg Fashion Co. Ltd. just bought control of Krizia SpA.
“In connection with this strategic investment, the two companies will explore opportunities to combine the strengths of Alibaba’s Internet commerce technology and platforms with Intime’s physical retail presence in high-end department stores and shopping malls as well as its retail Web site, Yintai.com,” Alibaba said.
“We see significant opportunities to extend our e-commerce platform to physical retail, developing a more engaging, omnichannel and digitally connected shopping experience,” said Daniel Zhang, chief operating officer of Alibaba Group.
The company said the two firms will work together on developing an online shopping experience connected to Intime’s physical stores and membership system. Alibaba said its e-commerce platform, Tmall.com, will have access to Intime’s offline inventory product database, broadening its product assortment and fulfillment capabilities.
Alibaba said customers will be able to access promotions and membership benefits by connecting their smartphones via Wi-Fi and location-based technology in Intime stores. Customers will be able to use virtual prepaid cards in department stores and for mobile points of sale through Alibaba’s payment service Alipay, said Alibaba, which declined to comment beyond its press statement.
Intime Retail, which is listed on the Hong Kong Stock Exchange, operated 36 stores, including 28 department stores and eight shopping centers, at of the end of last year, according to Alibaba. Intime has been aggressively expanding its reach, with six stores opening in 2013 and another nine in the pipeline for this year and next.
“For Intime, the cash investment from Alibaba will help them expand their retail network. This is a win-win for both sides; when Intime goes to new territories it also helps Alibaba to expand their reach in those cities,” said Jason Yu, general manager of Kantar World Panel.
According to Jasmine Sun, an e-commerce analyst at Shanghai-based consultancy Smith Street Solutions, the alliance is a formalizing of a long-term relationship between these two companies (which were both started in the city of Hangzhou) and their leaders.
“[Intime chairman] Shen Guojun has a good personal relationship with [Alibaba executive chairman and founder] Jack Ma and they have collaborated in the past on business associations and by experimenting with in-store payment systems,” Sun explained.
The investment will also bring together the massive amounts of information Intime has about members who shop at its physical retail outlets with the big data Alibaba has amassed on the shopping habits of its e-commerce customers.
“If they can develop the correct applications to drive consumers to Intime stores following online or mobile searches, they should be able to create a major competitive advantage in the brick-and-mortar space,” said Benjamin Cavender, business analyst at China Market Research Group.
According to Yu, Alibaba’s Intime investment is a direct response to the increasing popularity of Tencent Holdings Ltd.’s WeChat app, and it’s increasing usefulness in making mobile payments for many different online services. These include paying for taxis and restaurant bills (Alipay’s app also allows customers to pay for these kinds of things with their mobile phone).
“WeChat is putting Alibaba under quite a lot of pressure. Alipay used to be the only option, the default online payment platform, but Alibaba has lost some ground as WeChat payments become more popular for mobile,” Yu said.
As an increasing number of Chinese Internet users get online via smartphones, and the population becomes more comfortable with alternative options of payment — including virtual prepaid credit cards and QR codes — Web giants such as Alibaba, Tencent Holdings Ltd. and Baidu Inc. have stepped up their online-to-offline (O2O) maneuvering to increase their reach across China’s retailing sectors.
“If you look at smartphone ownership in China, especially in tier-two and -three cities, the growth is massive, and it will only get bigger. Now it’s more important than ever to have a strong mobile payments platform, and relationships with retailers, this connection between online and offline. Companies like Alibaba and Tencent know if they don’t do this, they are out of the game,” Sun said.
In response to the fevered activity in the area of new payment systems, the Chinese government recently revealed a ban on virtual credit cards planned by Tencent and Alibaba, as well as a halt to QR code payments. It’s thought this will be a temporary measure, designed to give authorities time to develop regulations and controls for the booming industry.
Last year, China’s O2O market was estimated to be around 60 million yuan, or $9.7 million, in terms of gross transaction value, according to iResearch Consulting Group. That may sound small but the research firm projects the figure will grow more than seven times by 2017.
Despite the increasing focus on O2O business in China, CMR Research’s Cavender believes none of the major players has converted their offline intentions into a successful strategy.
“They know that consumers are increasingly relying on mobile phones to get information on products and services, but so far nobody in China has done a great job of using that trend to efficiently drive consumers to make purchases in stores,” he said. “If Alibaba can be the first to do that, they will be able to improve the consumer experience, improve offline sales and convert sales that might otherwise be lost to another online or offline competitor.”
This is the latest in a string of acquisition deals for Alibaba. A few weeks ago, the company led a $280 million investment in TangoMe Inc., an instant messaging service, while in February it offered to buy the shares in AutoNavi Holdings Ltd. that it didn’t already own in a deal valuing the digital mapping service at about $1.6 billion. Also in March, Alibaba bought a 60 percent stake in Chinese television and film production firm ChinaVision Media Group for 6.24 billion Hong Kong dollars, or $804 million,
“I think these deals are very positive news [for Alibaba],” Yu of Kantar World Panel said. “A move like [the investment in Intime] gives investors the vision that Alibaba is building a regional empire — not just in the virtual world, but in the offline world as well.”
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