Alibaba bets USD2.9b on country’s top hypermarket player

Alibaba Group Holding Ltd. agreed to buy a stake in China’s largest operator of Wal- Mart-style hypermarkets for about USD2.9 billion, making its latest bet on the evolution of brick-and-mortar retail.

Alibaba is acquiring 36 percent of Sun Art Retail Group Ltd., which operates about 400 hypermarkets under the Auchan and RT-Mart banners. As part of the deal, France’s Auchan Retail SA will raise its stake in Sun Art to a similar level and form an alliance with the internet giant to tackle Chinese food retail.

The deal marks Alibaba’s latest investment in old-school shopping, as it pursues an ambition to shake up a $4 trillion brick-and-mortar retail arena. It’s also a major foray into groceries for China’s largest e-commerce operator, escalating competition with Wal-Mart Stores Inc. in the hypermarts that offer everything from fresh produce to electronics across the country.

The agreement grants Sun Art the technology and resources needed to expand into new markets, though Alibaba’s getting its stake at a steep 24-percent discount to its target’s most recent valuation, itself inflated by speculation about an investment since February. Shares in the hypermarket operator slid as much as 14 percent yesterday – its biggest intraday fall since February – but recovered to trade about 0.7 percent lower.

“Sun Art has a pretty good supply chain so cost-wise it might make more sense than Alibaba doing everything from scratch,” said Julia Pan, a Shanghai-based analyst at UOB Kayhian. “The new-retail strategy seems to be the new trend for e-commerce giants.”

Alibaba’s investment in Sun Art is the latest acquisition in a spree that’s also encompassed Suning Commerce and Intime Retail Group Co. The company’s staked much of its future on transforming old-school retail, infusing stores with the technology needed to better manage inventory and boost margins. It’s betting that a move into physical commerce will pump-prime the growth of its main online business, rope in millions of new shoppers, and expand its network into a relatively untapped Chinese hinterland.

It’s early days in Alibaba’s grand retail experiment, but if it works, it could deepen a lead over Jeff Bezos’ Amazon.com Inc. in the fragmented world of physical retail. Jack Ma’s company spent billions buying into grocers, shopping malls and even department stores long before Amazon announced its $13.7 billion acquisition of Whole Foods Market Inc.

The over-arching idea is to connect virtual and offline worlds, boosting online orders while amassing valuable customer purchasing data. Alibaba is trying to franchise a Hema model that combines a supermarket, restaurant and fulfillment center. It’s also enlisted 10 percent of China’s convenience stores, about 600,000 outlets, to hawk goods and get billions of parcels shipped to customers nationwide.

The Hangzhou-based company is already starting to see the initiative trickle into the top line: revenue from new retail – mainly its Hema supermarkets and Intime department stores –
more than quintupled in the September quarter.

“Sun Art can help Tmall to penetrate into lower tier cities,” Pan said. “Other cooperation could be on Hema.”

Sun Art, for its part, needs the capital and technology infusion. Auchan and RT-Mart have the biggest slice of China’s hypermarket business with about a 15 percent share, followed by Wal- Mart Stores Inc. with 10 percent, according to Euromonitor International. But the company has reported slower sales growth over the past three years as more Chinese shop online.

Like other retailers, Sun Art is now exploring ways to combine internet commerce with physical retail in a so-called “online-to-offline” or O2O model. It’s sought to make inroads into e-commerce after acquiring control of web grocery store Fields HK and Shanghai Diqi Network Technology Co.’s Xiaohehe
e-commerce business in 2015.

It “needs to get skill-sets on e-commerce and O2O to help them reach more tech-savvy young customers,” said Wai-Chan Chan, a retail partner at consultancy Oliver Wyman in Hong Kong.

Its decelerating growth and narrowing margins may be why Alibaba’s getting into Sun Art for about HKD6.50 a share versus its last traded price of HKD8.60 before shares were suspended Nov. 13. Yet Alibaba’s expertise may provide the necessary wherewithal to shore up its operations for the longer term.

Once the acquisition is completed, Alibaba, Auchan and a third company will own more than 77 percent of the company. As they may be considered “acting in concert,” the group may be required to make an offer for the remainder of Sun Art shares, the listed company said in its filing.

“Strategically it’s a good deal for Sun Art,” Chan said. “The massive customer data is expected to give Sun Art better understanding about customers and more experience to do business digitally.” Lulu Yilun Chen and Daniela Wei, Bloomberg