Alibaba has recently announced to take Intime Retail Group private. Upon the successful privatization of Intime, Alibaba will take over Intime’s physical networks across the country, including 29 department stores and 17 shopping malls. This signifies a strategic move of Alibaba to promote O2O integration with physical retailers, gain offline presence, and most importantly, put the “New Retail” strategy as the group’s core direction in 2017.

What happened?

On 28 December, 2016, Hong Kong-listed Intime Retail Group (“Intime”) received a proposal for privatization from joint offerors – Alibaba Group Holding (“Alibaba”) and Intime International Holdings Limited (with Intime’s founder, Shen Guojin being the director). The buyer will pay HK$ 10 per share for Intime stock, a 42% premium over the closing stock price of Intime on the last trading date. Upon completion, Alibaba will become the controlling shareholder of the company, with controlling stake of 73.7% from current 27.8%; Shen Guojin’s shareholding in Intime will increase to 16% from current 9%. The joint offer is estimated at HK$19.8 billion at maximum.

A win-win situation

For Alibaba – it can leverage Intime’s offline retail expertise and network, allowing deeper and more comprehensive integration of its online and offline business. The deal will further expand Alibaba’s growing physical footprint, therefore tapping a much bigger market in the long run. In addition, it will provide significant opportunities for “Tao-brands” (the Internet brands of Taobao) to connect with consumers through physical touch-points.
For Intime – the deal will possibly help the group to achieve a new breakthrough under the difficult market condition. It may help Intime to relief from the pressure of market and share price fluctuation due to the lackluster sales and dropping profitability under the “new normal” of slower economic growth. In terms of merchandise, Intime can leverage the gigantic network of Alibaba’s Taobao and Tmall to source hundreds and thousands of brands, from both local and overseas suppliers. Furthermore, the deal will allow Intime to gain access to Alibaba’s ecosystem (see Chart 1), particularly its online selling platforms, advertising venues (like its Youku Tudou video site), and cloud computing offerings, etc. After privatization, Intime can have more flexibility in overall business operations.

For both Alibaba and Intime – both parties can collaborate in big data analytics and implement more comprehensive O2O strategies so as to optimize customer experience, improve inventory turnover, and increase operation and supply chain efficiencies. Alibaba and Intime can explore ways to modernize, rejuvenate and transform China’s department store sector, as the sector has been struggling to cope with the growing popularity of online shopping.

Intime’s collaborations with Alibaba started since 2013…

Alibaba and Intime have a track record of successful O2O collaboration over the years.
In 2013, Intime’s 35 stores partnered with Alibaba on Singles’ Day promotions, piloting a model of seamless O2O transactions – selection of merchandise in store, then make purchase and payment online. The two companies also jointly promoted in-store payment using Alipay.

In 2014, Intime received Alibaba’s HK$5.37 billion strategic investment to cooperate on O2O initiatives. During the “Mobile Taobao 3.8 Life Festival” in 2014, Intime encouraged customers to use Taobao app to buy and send virtual gift cards.

In 2015, Intime adopted Alibaba’s newly launched one-stop shopping and location-based mobile app “Miao Street” in its stores nationwide in order to enhance customer shopping experience.

In 2016, Intime’s first online supermarket launched on Tmall Supermarket (chaoshi.tmall.com). By now, more than 40 “Tao-brands” including Inman, Sugargirl and Deerflyer have debuted in Intime stores. All these Tao brands have implemented O2O strategies to ensure full integration of online and offline resources in merchandise, price, warehousing, and logistics.

Key takeaways

“New Retail” to take off, online and offline cooperation deepens

The privatization offer clearly signifies a strategic move of Jack Ma’s “New Retail” initiatives, which is set to become a new model of online and offline retail in China. The impetus behind this deal is to ensure that Alibaba has control of a physical retail platform to advance its ambitions from clicks to bricks. In 2016, Jack Ma pointed out that pure e-commerce players would soon face tremendous challenges.

Starting in 2017, Alibaba would not mention the word “e-commerce”, as it would be replaced by “New Retail”. In fact, after years of explosive growth, Chin’s online retail sales growth has slowed down. Online retail sales of goods and services growth rate in Jan-Nov 2016 was 26.2% yoy (-8.3 ppt). Alibaba’s 11.11 2016 sales growth has slowed down to 32% yoy (-28 ppt). Pure-clicks players now aim for new growth paths and opportunities to expand their offline presence. Indeed, Alibaba started to invest in several offline retail players a few years ago, including Suning Commerce Group, Haier and its subsidiary RRS, Sanjiang Shopping Club, etc. – in a bid to extend its online dominance into physical retail.

We expect the privatization of Intime to transform the traditional department store sector with new business models, store formats and concepts, etc. It will allow Alibaba to do more experiments with Intime in the retail arena, which will impose profound long-term impact to the entire retail sector in China. Nonetheless, since the physical retail business is considered more complex than online retail business – from facing requirements of different supply chains for different regions, to regional differences in consumer behaviors and shopping patterns. We reckon that it may take some time for both Alibaba and Intime to fine-tune and align their business strategies and development.

Moving forward, we believe that deeper integration of offline and online players will become more prevalent in the “New Retail” era. Collaborations between leading e-commerce companies and physical retailers will enable these entities to gain a stronger foothold in the market and tap a larger market of both offline and online consumers in the long-run.