Why Tencent is aggressively investing in offline retail

The word has spread that retail enterprises will have to take sides and choose either Tencent or Alibaba amid the fierce “New Retail” business environment in China.

The USD 461.9 billion Alibaba Group now controls major online businesses in China, including Tmall, and there is no doubt the the Group is a dominant power in the retail landscape. Tencent, however, is aggressively trying to even the playing field and is using its strong data assets and knowledge of user habits. In 2017, Tencent strategically cooperated with the following companies to pave the way for future development.

New Retail and Yonghui Superstores

In December 2017, Tencent injected RMB 4.2 billion (USD 636 million) into Yonghui Superstores, the fifth-biggest supermarket in China, and thereby acquired a 5% stake.

According to Chinese finance media site STCN.com, the Shanghai-listed supermarket chain now has 526 branches around China, all of which will be useful pieces of offline infrastructure for Tencent’s future moves in retail.

Observers suspect the initiative behind the stock acquisition is Tencent’s desire to use Yonghui’s online to offline (O2O) retail stores “Chaoji Wuzhong” (Super Species), which provides fast deliveries, to rival Alibaba’s Hema Xiansheng (Hema).

Alibaba launched Hema throughout China to target busy households and individuals who expect efficient grocery delivery and high-quality lifestyle services. Customers can expect deliveries to arrive within 30 minutes when shipping addresses within 3 KM of the offline store. Hema is also equipped with automatic logistics chains to efficiently ship goods from Hema shopping malls to distribution areas.

However, with advantages in store numbers and available financing from A-share investors, Tencent’s Yonghui can challenge Alibaba on this front.

Super Species, the New Retail unit of Yonghui Superstores, has received positive market feedback. Photo from Sohu.com.

Traditional supermarkets and Carrefour

This January, one month after its investment in Yonghui, Tencent announced that, together with Yonghui Superstores, it would be investing in French supermarket Carrefour’s Chinese branches. If Tencent’s investment in Yonghui is based on a strategy of taking over potential competitors to combat major rivals, then the decision to invest in Carrefour is largely due to the chain’s branch locations, community influence, and other established resources.

Carrefour was very successful in China in the late 1990s and early 2000s. In recent years, however, the former offline retail leader suffered from performance declines and stagnation due to poor management, failed business strategies and rising online retail power.

The cooperation will not only significantly increase Carrefour’s potential for financing and the integration of its online resources, but will also provide Tencent with a shortcut to premium commercial locations.

Early supermarket players such as Carrefour boast excellent locations that can influence surrounding communities. This is because ten years ago, when offline and domestic retail groups were not strong enough to compete, Carrefour shaped China’s retail landscape and acquired major offline retail resources including commercial real-estate.

This collaboration involving Carrefour will also challenge Hema in both the offline shopping experience and delivery fields. Hema stores are mainly located far from city centers. It is very hard for retail businesses targeting high-quality goods and affordable delivery services to afford high rents in city centers. Therefore, city residents rely on convenience store deliveries from services such as “Meituan Paotui” (Meituan Errand) to order groceries. Such modes are efficient but lack mass-scale-based price advantages. On top of this, platform companies such as food delivery leader Meituan that use this errand model mainly profit from commission fees.

By joining the game, Carrefour will leverage its big bargaining power in pricing and channeling. Meanwhile, a diverse range of products beyond high-quality goods will satisfy consumers’ sophisticated needs.

Localization and BBG

In February, Tencent signed a strategic cooperation contract with Hunan-based retail enterprise BBG, the details of which are not yet public.This move signals another strategic tactic in heated retail competition in China: localization.

BBG’s rapid growth in quickly developing Hunan Province implies that Tencent is aggressively acquiring regional retail powers to combat Alibaba’s and other national retail networks’ fast expansion and penetration.

BBG was listed in 2008 on China’s Shenzhen Stock Exchange. The company now owns supermarkets, malls and convenience stores.

Conglomerates and Wanda Commercial

On January 29th, Tencent, along with Suning, JD.com, and Sunac, led a USD 5.4 billion investment in Wanda Group’s Wanda Commerce for around 14% of all shares.

The deal was not simply seen as a positive development for the parties involved. Instead, many are still concerned about Wanda’s debt situation as well as Sunac’s growing involvement in Wanda. On the other hand, Tencent and JD.com’s may have future expectations that are beyond their businesses and profits.

It is likely that Tencent and the other three players will make use of Wanda President Wang Jianlin’s extensive networks in Chinese real estate, entertainment, retail, gaming, and other fields in order to strengthen and shape a collaboration far beyond retail.

This collaboration also signals that Wang can relax a bit. Tencent and the other companies also share significant high-level connections, and this in China will mean a rather smooth near future that is not likely to be significantly haunted by political risks if no big scandals break out.

This would also reduce concerns over the flagship Wanda Group and the company will be more willing to contribute to this Tencent-led cooperation by offering other exclusive channels and brokering resources.

Segmented markets and HLA Heilan Home

As an offline chain targeting middle-end menswear, HLA Heilan Home’s cooperation with Tencent is considered a signal of the leading market players’ moves toward segmented markets. Alibaba, for instance, invested USD 8.66 million into home furniture and accessory retailer Easyhome to accelerate its offline experience.

What we have observed is Tencent’s strategy in leveraging existing resources instead of creating new ones. This move not only significantly reduces costs, but also takes advantage of resources including human capital, channels, locations and other elements that play crucial parts in further business operations.

However, we should also note that the abovementioned enterprises, before Tencent’s investment, were looking for greater business growth and expansion, and some of them were in bad operating conditions. To Tencent, such situations offered chances to make cheap deals with proven companies that will give the tech giant more power in bargaining and future operation negotiations.

As Alibaba and retail giants including JD.com have already established comprehensive retail ecosystem and cultivated user habits, it will still be very hard for Tencent to catch up. On the other hand, if the tech giant targets specific retail segments or hopes to simply grab a piece from China’s big retail cake without ambitious thought such as completely taking over Alibaba, the market will see some good results very soon.

(Top photo from Sohu.com)

Fiona Zhao
Fiona Zhao

Fiona writes for AllTechAsia. She has rich business experience across several industries in China. She holds a master's degree in Anthropology from the London School of Economics and Political Science and a bachelor’s degree in Economics and Politics from The University of Manchester. Fiona is particularly interested in how technology and business combine to shape societies across the world.

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