Why does Alibaba want to swallow food delivery app Ele.me?

Alibaba has snapped up Ele.me, China’s largest food delivery startup, for 9.5 billion USD, as the e-commerce giant doubles down on its efforts to encourage more consumers to spend online.

Alibaba and its payment arm Ant Financial already owned about 40% of Ele.me before the announcement this week. After the takeover, Ele.me founder Zhang Xuhao will act as chairman while the Alibaba Vice President Wang Lei will take over as CEO.

The merger allows Alibaba to tap into Ele.me’s army of couriers and logistics infrastructure as well as collect more consumer data. In turn, Ele.me stands to benefit from Alibaba’s retail prowess. The tie-up is set to challenge rival company Tencent, which backs Meituan-Dianping, a competitor of Ele.me that is valued at 30 billion USD. Ele.me and Meituan-Dianping have been battling it out in China’s 32 billion USD food delivery business, with the two controlling close to 90% of the market share.

Like many Western tech giants, Ele.me, which translates as “ Hungry yet?”, was born on a university campus. In 2008, Zhang saw a business opportunity in connecting small restaurants to university students through just a few swipes and clicks. After a bumpy start, his business soon gained momentum, as it now attracts more than 260 million users and boasts 3 million couriers.

The deal is just the latest in a series of mergers in China’s tech sector as start-ups are joining forces to expand their businesses. Earlier this week, Meituan-Dianping bought China’s major bike-sharing firm Mobike, and executives from both companies hailed the marriage as the start of “a new beginning.”

In acquiring Ele.me, Alibaba is following through on its so-called “new retail” initiative in which sales are generated both online and from brick-and-mortar shops. As an early pioneer in doing so, Ele.me is a natural trophy for China’s most famous online shopping giant, which has in recent years invested in grocery stores and electronic franchises.

In addition, Ele.me’s data – where customers eat and their food preferences – will further aid Alibaba to identify new growth points. Alibaba already operates its chain store Hema Shengxian, which promises delivery of fresh produce to customers in a 3 kilometer radius within 30 minutes, a business model not unsimilar to that of Ele.me.

“What’s significant about this merger is not the sufficient capital we’re going to receive, but the strong networks and coordination it brings. We have more in our arsenal than others.” Zhang  told Chinese press this week.

Competition in winning over the stomach of China’s middle class is already fierce, but more consolidations will push that fight to a new level as Alibaba takes the helm of one of China’s top food delivery firms.

Meituan-Dianping, whose market share is slightly higher than Ele.me’s, appears ready to take up the challenge. In a statement in reference to Alibaba’s foray into the food delivery business, it said it welcomes the newcomer. The industry’s explosive growth in recent years, the statement said, is a result of the competition between the two companies.

(Top photo from Sina Tech)

Owen Guo
Owen Guo

Owen is our columnist. He's pursing a masters degree in public policy in Canada. Before returning to school, he was a researcher and writer in the Beijing bureau of The New York Times. Prior to that, he covered energy and environmental issues for The Financial Times in Beijing.

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