INTERNET: Baidu Throws Nuomi at Dianping, Meituan

Bottom line: Baidu’s spending blitz at Nuomi looks like a good but expensive strategy to help the company quickly pick up market share in the group buying space, and could pose a serious challenge to industry leaders Dianping and Meituan.

About Internet Giant Baidu

Baidu revs up spending at Nuomi

Internet giant Baidu (Nasdaq: BIDU) is making a major push into the group buying space, announcing a bold campaign that includes 20 billion yuan ($3.2 billion) in new spending as it aims to replicate its earliest success in online search. This particular campaign is focused on Baidu’s Nuomi group buying site that it purchased a year and a half ago, and has the site’s chief saying he aims to overtake industry leaders Dianping and Meituan in the next 1 year and 3 years, respectively.

This particular campaign surprised me a bit, as Baidu hasn’t really announced any major plans for Nuomi since buying the company from struggling social networking site Renren (NYSE: RENN) for more than $200 million. But this kind of move would be similar to what Baidu did with online travel site Qunar (Nasdaq: QUNR), which was already growing quickly when Baidu purchased a controlling stake in 2011. Since then, Qunar has made an IPO and Baidu has poured big money into the company, which is now posing a serious challenge to longtime industry leader Ctrip. (Nasdaq: CTRP)

Baidu CompanyBaidu situation

I’ve long been critical of Baidu for its inability to organically grow new businesses outside its core search area, following major flops in the social networking and e-commerce spaces, among many similar efforts. But the Qunar experience shows that Baidu’s big cash reserves can be a potent weapon when combined with an existing well-run acquisition. Baidu has also had similar success with its online video service iQiyi, and now looks like its trying to do the same thing in group buying.

The latest reports cite Nuomi CEO Yin Sheng discussing how he plans by the end of this year to propel his site past Dianping, the Tencent-backed (HKEx: 700) rival that rose to fame on its restaurant ratings service and is often called the Yelp (NYSE: YLP) of China. (Chinese article) Beyond that he hopes to overtake industry leader Meituan within 3 years, according to the report.

Yin’s aggressive targets come not long after other reports said that Baidu had created a war chest of 20 billion yuan aimed at developing its online-to-offline (O2O) businesses, with much of the funds aimed at developing Nuomi. As I’ve said above, this kind of strategy of combining Baidu’s huge cash reserves with a successful young and fast-growing business seems to be an effective model for the company as it tries to expand beyond its core search business.

Templates for Success in Qunar, iQiyi

Qunar and iQiyi are both good cases in point. The former was started much later than Ctrip. It also uses a slightly different business model that sees it operate a marketplace for third-party travel agents rather than directly selling hotel rooms and air tickets to online shoppers. But despite that late arrival, the company has rapidly gained traction and is now a solid number-two in the market behind only Ctrip.

Qunar also made an IPO along the way in late 2013, and has a market value of about $5 billion, or half that of Ctrip’s. Of course it’s also worth noting that Ctrip is a highly profitable company, whereas Qunar is losing big money, including a whopping $113 billion loss in its latest reporting quarter. But with a wealthy backer like Baidu, Qunar has clearly decided to seek growth and market share, even if it means swallowing big losses in that process with no profits in sight.

iQiyi is in a similar situation, believed to be losing big money even as it consolidates its position as one of China’s leading online video sites. Now it appears Nuomi will join the list of that Baidu-affiliates that use the “outspend your rivals” business model. At the end of the day this model actually seems like a good use for Baidu’s large cash reserves, though it could also result in bruising price wars that lead to big losses for everyone.

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