RETAIL: O2O Wave Crests with Alibaba’s $4.6 Bln Suning Tie-Up

Bottom line: Alibaba’s new tie-up with Suning looks logical on the surface but is likely to run into problems due to overlap in the 2 partners’ businesses, which could lead to conflicts and an ultimate dissolution of the partnership.

Alibaba, Suning in massive new tie-up

I’m officially labeling today as “O2O Day” in China, as a recent wave of online-to-offline (O2O) tie-ups reaches a crescendo with news of a $4.6 billion investment by e-commerce giant Alibaba (HKEx: BABA) in traditional electronics retailer Suning (Shenzhen: 002024). Media aren’t really commenting on the size of the deal that will give Alibaba a 20 percent stake of Suning, but to my knowledge it’s the largest such deal in China Internet history and also quite possibly the largest ever by a Chinese tech company.

All that said, I’ll be quite blunt and add my view that I don’t completely understand the logic behind this particular deal and thus wouldn’t expect it to yield very strong returns. On the surface it looks like a classic O2O deal, combining Alibaba’s strength in online retailing with Suning’s in traditional retailing. But a closer look show this deal could be set for a bumpy ride for a number of factors, which I’ll discuss shortly.

But first let’s look at this blockbuster tie-up that is likely to keep the record for biggest investment by a Chinese Internet company for quite a while. I’ve written about O2O several times recently, including just this week, following a string of major moves involving such big names as electronics retailer Gome (HKEx: 493) and Alibaba rival JD.com (Nasdaq: JD). (previous post)

Such tie-ups represent a future that will see retailers operate through a hybrid business model that combines offline and online channels. Examples of such models include take-out dining services that combine online ordering with offline delivery, and group buying sites that allow people to use online channels to buy services from real-world retailers like movie theaters and restaurants.

Alibaba’s blockbuster deal will see it pay 28.3 billion yuan ($4.6 billion) for newly issued Suning shares, while Suning will also invest 14 billion yuan for a 1.1 percent stake of Alibaba. (English article; Chinese article) The deal would make Alibaba Suning’s second largest shareholder, and will give it access to the company’s 1,600 China outlets where consumers could pick up goods after ordering them online or test out goods before making an online purchase.

Assault on JD.com

Media are playing up the move as a direct assault on Alibaba’s biggest rival JD.com, whose shares tanked 6.3 percent in the latest trading session after it reported an $82 million second-quarter net loss late last week. JD.com was also in the O2O headlines just last week, announcing its own $700 million investment in traditional supermarket operator Yonghui Superstores (Shanghai: 601933). (previous post)

But whereas the JD.com deal looks relatively logical due to the complimentary nature of the 2 companies, this latest Alibaba tie-up looks more problematic. The biggest conflict is Suning’s own aspirations to become an e-commerce giant.

Suning is already one of China’s leading traditional retailers, and has invested hundreds of millions of dollars in its own online business over the last few years as it diversifies beyond its traditional strength in electronics. That means that Suning and Alibaba are already fierce rivals in many areas, and thus Suning may be reluctant to open its brick-and mortar stores to Alibaba for many types of products where they compete.

In addition, Alibaba founder Jack Ma and Suning co-founder and Chairman Zhang Jindong are both very successful men and have large egos to match their success. That’s not unusual for founders of successful Chinese companies, but it does often lead to conflicts when leaders don’t agree on strategy and could easily complicate this particular tie-up.

At the end of the day we’ll have to give this alliance some time to see if it works out, and it’s possible it could bear some fruit. But I wouldn’t put the chances of big success very high, and expect this particular marriage could ultimately end in a messy divorce similar to the one between Alibaba and former major stakeholder Yahoo (Nasdaq: YHOO).

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