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Analysis

Tencent + Carrefour vs Alibaba

Swords are being unsheathed in the retail industry. A long-drawn battle is in the offing

Feb 9, 2018 by The Passage Team
Tencent + Carrefour vs Alibaba

Cathy Yang

Chinese tech giant Tencent Holdings Ltd plans to invest in Carrefour’s struggling business in China. The move virtually draws their battlelines against Alibaba at a time when the traditional retailing industry is being uprooted in China.

The French retailer announced potential investment by Tencent and China’s hypermarket operator Yonghui Superstors Co on January 23, as well as a strategic cooperation agreement with Tencent in China.

By combining brick-and-mortar retail network with technology, the cooperation aims at smart retail, mobile payment, in-store experience and data analysis, according to Carrefour’s announcement.

The announcement did not reveal the investment volume but clarified that upon completion of this investment, Carrefour will remain the largest shareholder of Carrefour China.

Hong Kong-listed Tencent grew 3.2 percent to close at a record high on the day after the investment was announced.

Internet giants’ grocery business

Although the investment deal is awaiting the regulator’s approval, it is not Tencent’s first incursion into the offline retail sector coveted by its rival Alibaba Group Holding Ltd.

Chinese Internet giants, including Tencent, are mostly known for games and instant messaging app WeChat. But in the recent past, Tencent vowed to change the offline retail industry with online services.

Pony Ma, founder and CEO of Tencent said last October that Tencent would offer “smart retailing” solution that connects a social platform with online/offline purchase and eventually to empower retailers and improve the shopping experience.

At the Tencent Global Partner Conference in November 2017, the company’s COO Ren Yuxin (Mark Ren) announced the company would rapidly digitalize the retail industry.

Last year, Tencent acquired five percent of Yonghui with 4.22 billion yuan (660.5 million US dollars) and also got a 15 percent stake in Yonghui’s subsidiary Yonghui Yunchuang, which runs Super Species, a fresh food grocery store that competes with Alibaba’s chain of supermarkets named Hema.

Tencent’s “smart retailing” solution is nothing less than a declaration of war against e-commerce giant Alibaba’s “new retailing” model, which is a combination of online retailing and offline logistics, proposed by Jack Ma in late 2016.

With online retailing and its widely-used payment tool Alipay as its chief strengths, Jack Ma’s company has poured billions into grocers and shopping malls, including Intime Retail Group Co, Lianhua and Sanjiang.

One of Alibaba’s latest push into offline retail took the form of a $2.9bn investment for a 36.16% stake in Sun Art Retail Group, one of China’s leading hypermarket operators. The investment, announced in November last year, made Alibaba the second largest shareholder of Hong Kong-listed Sun Art. The investment is a part of Alibaba’s alliance with French retailer Auchan Retail S.A. and Taiwan’s Ruentex Group, a partnership that is believed to be putting more pressure on Carrefour’s struggling business in China.

Fight for the dining table

When Internet companies are fighting tooth and nails for consumer traffic, no one can turn a blind eye to groceries, especially fresh food, which is a high-frequency purchase category. In China, fresh food is one of the few segments that have not been captured by Internet companies.

The e-commerce penetration ratio of the fresh food market is less than 0.7 percent in 2016, according to data from China E-commerce Research Center and National Bureau of Statistics. But the trend is changing fast. Tech firms are ramping up investment in the segment. As a result, they garnered 139.13bn yuan in fresh food sales in 2017, a 59.7% year-on-year growth, according to Chinese consultancy firm iResearch.

Therefore, Yonghui’s advantage in fresh food, especially its sub-brand Super Species, a store offering fresh food and catering service, is regarded as the main reason for Tencent’s investment.

Yonghui, which already has an e-commerce investor JD.com Inc, is China’s fourth largest supermarket operator by market share with 580 stores across the country.

Alibaba has attached great importance to its newly launched fresh food brand Hema, which has opened 29 stores in seven Chinese cities and will continue to expand in major cities in 2018, with 30 new stores opening in Beijing alone.

https://cdn.thepassage.cc/filters:quality(70)/public/image/2018/02/chaoshi2-300x169.png

_ A Hema store in Beijing /Hema Photo_

Other parts of the globe are also witnessing the acquisition of offline retailers by online giants. Take, for instance, . Amazon's $13.7bn acquisition of Whole Foods last June which shocked the industry.

Struggling physical retailers

Carrefour, Europe’s largest retailer, entered the Chinese market in 1995 and enjoyed a fast growth in the first decade. It opened 100 stores in China in 2006, much higher than of the number of stores opened by Wal-Mart.

However, with the rising influence of e-commerce and changing purchase habits of younger consumers, Carrefour started losing market share starting 2012.

https://cdn.thepassage.cc/filters:quality(70)/public/image/2018/02/chaoshi3-300x194.png

_ A Carrefour supermarket in Beijing /VCG Photo_

In recent years, labor disputes and the regular closing of stores have cast doubts on the retailer’s reliability. A mere week before the Tencent cooperation announcement, there was media speculation that Carrefour would sell its China unit. The company quickly denied this possibility.

On the very day that Carrefour announced its deal with Tencent and Yonghui, it also revealed its transformation plan titled “Carrefour 2022,” which includes a “voluntary departure plan” for 2,400 staff in France. This move alone will save the company €2bn in labor costs.

Carrefour 2022 also declares a shift in focus into new partnerships and internet-based services. Cooperation with Tencent in China and a €2.8bn investment plan on digital will, therefore, be natural elements of the transformational plan.

Just like Chinese internet companies, Carrefour has ambitious goals in the fresh food segment, including getting 1 million additional consumers in France by 2022 and registering a growth in fresh food sales that’s three times higher than that of FMCG (fast moving consumer goods).

Carrefour would be able to leverage its new partnership with Tencent and Yonghui to improve its online exposure as well as consumer traffic.

Meanwhile, to offset the lack of progress that was supposed to follow JD.com’s investment, Yonghui can strengthen its fresh food business using Tencent’s data technology and Carrefour’s hypermarket network across the country.

To reiterate, battlelines have been drawn between Tencent and Alibaba. Whether they like it or not, other players in the grocery retail business may have to get involved in the bloodbath that follows.

The Passage Team

The Passage is committed to creating in-depth content over technology industry across Asia with a focus on emerging startups in the technology, healthcare, education, food, tech, travel & mobility segments.

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