Embracing Internet plus - Strategic partnership between leading retail players

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1 China Retail Embracing Internet plus - Strategic partnership between leading retail players The cases of Alibaba and Suning Commerce / JD.com and Yonghui Superstores August

2 Introduction Competitive landscape for the online and offline market in China s retail sector is getting tougher even for the leading players. Recently, many players are embracing government s Internet plus and O2O strategy. The Internet plus initiative entails the integration of mobile Internet, cloud computing, big data and Internet of Things with modern manufacturing, fostering new industries and business development, including e-commerce, industrial Internet and Internet finance 1. The strategic partnership between Alibaba and Suning Commerce, and between JD.com and Yonghui Superstores in August 2015 are some cases in point to explore the synergies in O2O development and the integration of online and offline retail. The Internet plus initiative The Internet plus initiative was first mentioned by China s premier Li Keqiang at the National People s Congress on 5 March, The concept of Internet plus marks the launch of a new model for industries based on the evolution of the Internet bringing together the mobile Internet, cloud computing, big data and the Internet of Things with modern manufacturing, encouraging healthy development of e-commerce, industrial networks and Internet banking, and helping Internet companies increase international presence. Following the announcement of the initiative, the Ministry of Commerce further released the Internet Plus Circulation ( 互 联 网 + 流 通 ) action plan in May facilitate the application of the Internet in the commercial sector. to 2

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4 A new O2O era Many retailers and commercial enterprises have been engaging in various types of O2O initiatives over recent years, all with a common goal to enhance customer shopping experience. That said, most enterprises focus largely on using the Internet and mobile technology to optimise their offline assets. Traditional retailers are seeking partnerships with Internet companies to equip them with tools that can facilitate online and offline shopping, such as payment tools, social media, and big data analysis. At the same time, Internet companies are also searching for opportunities to expand offline to reach consumers. Partnering with traditional retailers enables Internet companies to improve their logistics capability and provide better after-sales services for customers. Exhibit 1 O2O in China Source: Fung Business Intelligence Centre 4

5 Exhibit 2 Common O2O practices in China Source: Fung Business Intelligence Centre Two significant deals that took place in August the strategic partnership between Alibaba and Suning Commerce, and between JD.com and Yonghui Superstores - can best illustrate the alignment of Internet companies and leading retailers to explore the synergies in O2O development. 5

6 Alibaba s strategic partnership with Suning Commerce Alibaba is the leading Internet company in China. Alibaba has penetrated into various industries including online shopping, wholesale, logistics, finance, cross-border e-commerce, cloud computing and data management, etc. Alibaba s Tmall is the market leader in the B2C sector with a market share of 61% in Suning is the leading commercial enterprise in China with more than 1,600 chain stores covering over 600 cities in Mainland China, Hong Kong and Japan. Its e-commerce platform, Suning.com, ranks third in China's B2C sector with a market share of 3.2% in Suning is also one of China s largest consumer electronics retailers. The agreement On 10 August, Alibaba and Suning Commerce jointly announced the strategic tie-up of the two companies. They will cooperate in various areas including e-commerce, logistics and incremental business through joint omni-channel initiatives. Alibaba will invest 28.3 billion yuan for a 19.99% stake in Suning and Suning will invest up to 14 billion yuan for a 1.1% stake in Alibaba 5. Alibaba s investment in Suning will be the company s biggest single share purchase since its IPO on the New York Stock Exchange back in September Post-transaction, Alibaba will become the second largest shareholder in Suning Commerce and will have two independent director seats on the board of Suning. 6

7 Key initiatives include: 1. Suning will open a flagship store on Alibaba s Tmall platform, focusing on consumer electronics, home appliances and baby products. 2. Suning will become a partner of Cainiao, Alibaba s logistics affiliate. Suning boasts a nationwide logistics network covering over 90% of China's counties including eight national distribution centers, 57 regional distribution centers, 353 city forwarding centers and over 1,700 last-mile delivery stations. Customers are expected to receive their orders in as fast as two hours in the near future. 3. Alibaba will capitalise on Suning s extensive network of offline stores, and expand its offline presence. Suning has 1,600 offline stores in 289 cities, and 3,000 after-sales service locations and over 5,000 affiliate servicing partners in 320 cities across China. 4. Suning can leverage Alibaba s edge in technology and big data. Both parties can explore O2O opportunities that better serve customers needs and preferences. 7

8 Our view 8

9 JD.com s alignment with Yonghui Superstores JD.com is the second largest B2C online retailer in China with a market share of 18.6% in It also has operations in various industries including logistics, finance, smart home products market 7, cross-border e-commerce, crowdsourcing deliveries, etc 8. Yonghui Superstores Co. Ltd. currently runs 351 supermarkets in Mainland China as of 1H15, specialising in fresh products. Yonghui has been actively exploring O2O strategies and trying to seamlessly integrate its offline stores, website and mobile app. The agreement On 7 August, JD.com entered into definitive agreements with Yonghui Superstores Co., Ltd. JD.com has agreed to invest 4.3 billion yuan for a 10% stake in Yonghui Superstores. Under the terms of the deal, JD.com has the right to nominate two directors, including one independent director, on Yonghui s board of directors. Yonghui will ally with JD.com on its online platform, O2O business, warehousing and logistics, and Internet finance business 9. 9

10 Key initiatives include: 1. Yonghui and JD.com will form a strategic partnership to strengthen supply chain management through joint procurement. 2. Both companies will continue to explore development opportunities in O2O and other areas of potential strategic cooperation. 3. Yonghui will further build up its O2O business model, integrate its online and offline business and fulfill the last mile delivery service. Our view 10

11 Impact of strategic alliance between leading retail players Cooperation between online and offline giants to pursue O2O strategies is a trend to watch in China s retail sector. The Fung Business Intelligence Centre believes in the short term, strategic partnership between leading retail players will help improve share price performance of those publicly-listed enterprises involved. Meanwhile, we expect more intense price wars popular in categories such as home electronics and fresh food products as the big e-commerce players continue to compete for a bigger share of the market. Over the longer term, consolidation of both online and offline retail segments is expected to speed up. Some other big retailers or Internet companies may follow suit to look for strategic alliance in order to consolidate their market position. It is crucial for enterprises to be mindful of all possible post-integration issues such as conflicts of interests and differences in corporate cultures and values, as these may hinder the integration process. If these problems cannot be resolved, integration may not necessarily lead to a win-win outcome. 11

12 Endnotes 1 "Report on the Work of the Government." March State Council. 2 " 'Internet Plus Circulation' action plan." May Ministry of Commerce of the PRC. 3 "Statistics on e-commerce in China." December iresearch. 4 "Statistics on e-commerce in China." December iresearch. 5 "Alibaba and Suning Commerce enter into strategic alliance." 10 August Alibaba Group. 6 "Statistics on e-commerce in China." December iresearch. 7 "JD.com showcases latest JD smart ecosystem products at CES Asia." 25 May, JD.com 8 "JD.com Website." Accessed on 18 August, "JD.com announces second quarter 2015 results." 7 August, JD.com. 12

13 Contacts Teresa Lam Vice President Asia Distribution and Retail E: Christy Li Research Manager Asia Distribution and Retail E: Fung Business Intelligence Centre 10/F LiFung Tower 888 Cheung Sha Wan Road Kowloon, Hong Kong W: Find us on Social Media: Picture source: Copyright 2015 The Fung Business Intelligence Centre. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Though the Fung Business Intelligence Centre endeavours to ensure the information provided in this publication is accurate and updated, no legal liability can be attached as to the contents hereof. Reproduction or redistribution of this material without prior written consent of the Fung Business Intelligence Centre is prohibited. 13