RETAIL: O2O in Overdrive With JD, Gome, Yonghui Plans

By newsdoug on August 11, 2015

Bottom line: Aggressive spending on O2O initiatives by China’s traditional and online retailers is likely to produce a new boom-bust cycle, and companies should consider more M&A as part of their plans.

Online-to-offline retail services, often called O2O, have become the flavor of the day for traditional and web-based Chinese retailers over the last year, with at least 3 major new announcements coming out on the topic late last week. Two involved big internal campaigns to boost O2O services at electronics retailer Gome (HKEx: 493) and traditional supermarket chain Renrenle (Shenzhen: 002336), while a third saw e-commerce giant JD.com (Nasdaq: JD) make a major investment in traditional retailer Yonghui Superstores (Shanghai: 601933).

Those efforts come just a week after leading search engine Baidu (Nasdaq: BIDU) reported disappointing quarterly earnings due to heavy spending on O2O, and more generally as O2O has become a buzzword for nearly all of China’s major traditional and online retailers. The activity surge reflects realization that leading retailers of the future will operate a hybrid model that uses both online and offline channels to sell products and services.
But the recent explosion also represents an all-too-common Chinese mentality that sees companies in specific sectors blindly jump on the latest trends, often resulting in boom-bust cycles and billions of dollars in wasted investment. While Chinese retailers should be commended for recognizing the importance of O2O, they should also think more carefully about their strategies before rolling out new plans costing hundreds of millions of dollars.

Those plans could and should also include some mergers and acquisitions that are sorely needed in the overheated and highly fragmented online and traditional retailing spaces. Such activity would provide the consolidation that is truly needed to create a more efficient Chinese retailing sector complete with cutting-edge O2O services.

The practice of combining online and offline channels in the retailing sphere first took off about 5 years ago, when US group buying site Groupon (Nasdaq: GRPN) exploded onto the scene by offering big discounts online for real-world products like restaurant meals and movie tickets. Since then the trend has expanded to other areas like take-out dining services and mobile apps that allow people to hire taxis and private cars.

Barely a week goes by now without a major new O2O initiative, and the 3 last week were quite typical. The largest saw JD.com say it would pay 4.3 billion yuan ($700 million) for 10 percent of leading supermarket chain Yonghui Superstores, pooling the former’s vast online resources with the latter’s 364 traditional supermarkets. (English article; Chinese article)

The second deal saw rival supermarket operator Renrenle announce plans to raise 2.3 billion yuan for e-commerce and O2O initiatives through the private placement of up to 132 million new shares. (English article; Chinese article) The plan included development of an e-commerce platform called Renren Legou, which would allow customers to order groceries online and pick them up at any of 500 new O2O locations it plans to build.

Finally there was Gome, a traditional electronics retailer, which announced a major corporate overhaul to build up its laggard online business as part of a broader push into O2O services. (English article; Chinese article) Part of the plan included an eventual spin-off and IPO for its online businesses, indicating Gome will spend hundreds of millions of dollars to build up its online unit to complement its traditional stores.

Industry Scramble

Most of China’s other major Internet companies and many traditional retailers have also piled into the trend with their own major investments over the last year.

Among the most aggressive is Tencent (HKEx: 700), which has invested in both JD.com and Dianping, one of China’s top group buying sites and itself an investor in one of the country’s leading take-out dining delivery services. Baidu has also invested heavily through its purchase of group buying site Nuomi for more than $200 million, and plans to spend 20 billion yuan to build up the service over the next few years.

This O2O explosion looks similar to what happened in the original group buying space 5 years ago. That boom saw thousands of new operators open in a very short period, only to mostly collapse over the next 3 years. China’s traditional and online retail sectors are already quite crowded and plagued by cutthroat competition, and are in dire need of consolidation to create a healthier, more sustainable sector.

Many of these companies now spending aggressively on O2O are doing so to try to position themselves as the long-term winners in China’s retailing sector. That strategy looks wise, though it’s only part of the equation. To truly ensure their future, and give their shareholders the best possible returns for their investment, many of these companies should also consider more aggressive M&A that could include buying rivals outright, or even selling themselves to better-run competitors.