Background

On 21 June, 2018, Suning and RT-Mart jointly announced the signing of a memorandum of understanding (MoU) to cooperate in the selling of home electronics in RT-Mart’s stores in mainland China, including its current 393 stores and the future stores. According to the announcement, the cooperation will be based on a concessionary model – Suning will be responsible to run the home electronic concession in RT-Mart; while RT-Mart will be responsible for the management and operations of the whole hypermarket. All products in the home electronics concession will be sourced by Suning. The two parties will use the same pricing and promotions for home electronics sold in their stores. The cooperation will become effective starting August 2018. The cooperation of the two companies is also expected to expand into other product categories in the future.

Comments from Fung Business Intelligence

Alibaba Group Holding is a major shareholder in both Suning.com (owned by Suning Holdings Group) and Sun Art Retail (which operates RT-Mart stores in mainland China); it is not surprising to see the tie-up of Suning and RT-Mart. Alibaba is the second-largest shareholder of Suning.com – it has a 19.99% stake in Suning.com since it invested in the company in August 2015. On the other hand, in February 2017 (before Alibaba invested in Sun Art Retail), Sun Art Retail Group announced that it had preliminary discussions with Suning in respect of potential cooperation, showing the interest of Suning in Sun Art Retail despite no further cooperation was made after that. In November 2017, Alibaba announced to acquire a 36.16% stake in Sun Art Retail. Later in January 2018, Taobao China Holdings further purchased shares of Sun Art Retail, making Alibaba holding 71.98% of the total shares of Sun Art Retail. Since then, Alibaba has helped RT-Mart transform its business operations according to Alibaba’s “New Retail” strategy. Fung Business Intelligence believes the partnership is in line with Alibaba’s “New Retail” initiatives as it involves supply chain integration as well as integration of online and offline resources. The partnership also secures Alibaba’s market position in the home electronics sector so as to better compete with JD.com.

As part of its “Smart Retail” strategy, Suning has been actively pursuing omni-channel retailing, while putting more focus on local lifestyle services and entertainment. It has launched various new retail formats to build its ecosystem around smart retailing. In our view, the cooperation with RT-Mart is another move for Suning to pursue its “Smart Retail” strategy by enhancing its distribution channel as well as supply chain efficiency.
For Suning, the cooperation with RT-Mart can extend their reach offline by adding RT-Mart stores as their new distribution channels, which can possibly generate more revenue. RT-Mart has 393 stores nationwide as of June 2018. Moreover, the new distribution channels enable Suning to reach more consumers especially in the lower-tier cities where RT-Mart has extensive presence. We expect that the partnership will help Suning further expand its market share in the 3C (computer, communication and consumer electronics market).

Meanwhile, Suning also mentioned that the cooperation will be based on a concessionary model – Suning will be responsible to run the home electronic concession in RT-Mart; while RT-Mart will be responsible for the management and operations of the whole hypermarket. All products in the home electronics concession will be sourced by Suning. Suning can thus have the control at the sourcing end and expand its sourcing volume. At the same time, Suning can increase its bargaining power when negotiating with manufacturers and suppliers, and hopefully get better pricing and distribution terms for exclusive products and popular products, so as to improve Suning’s profit margin and sales.

For RT-Mart, the cooperation with Suning can help the company improve the sales of its home electronics category. It is reported that RT-Mart has been reducing its home electronics business since 2015 to focus more on fresh food. Indeed, sales generated from the home electronics concession in hypermarkets can be as high as 20% of the total store sales, according to industry practitioners. Thus it is a market segment not to be missed. Also, compared with leading home electronics giants such as Gome or JD.com, RT-Mart has lower bargaining power when it comes to negotiation with manufacturers for lower costs. It would be rather difficult for RT-Mart to run the home electronics concession by itself. By cooperating with Suning, RT-Mart can leverage Suning’s capabilities and expertise in sourcing and selling home electronic products. Moreover, prices and promotions in the home electronics concession in RT-Mart will be the same as other Suning stores. We believe it will be able to draw consumer traffics especially in areas which do not have Suning stores nearby.

Last but not least, RT-Mart has been working with Alibaba’s Hema Xiansheng in fresh food business. On 2 June, 2018, RT-Mart and Hema Xiansheng jointly opened the first store of “Hexiaoma” (盒小马) supermarket in Suzhou. It is not surprising to see RT-Mart cooperating with other companies to work in the area it is not strong at. Cooperating with Suning is certainly a move that can improve RT-Mart’s operation efficiency, gain more consumer traffic, as well as streamline its supply chain by outsourcing the home electronics concession to Suning.

Latest transformation initiatives of Suning and RT-Mart

Suning – transforming itself from a traditional retailer to a smart retailer
In December 2017, Suning introduced its “Smart Retail” strategy to cater to the ever-changing consumer needs in the new retail environment. Since then, Suning has been introducing various new retail formats, which include “Suning.com Plaza” (苏宁易购广场) to provide a one-stop solution for shopping and entertainment; “Suning Xiaodian” (苏宁小店) in urban areas and “Suning.com Direct-sales Store” (苏宁易购直营店) in rural areas to provide convenient and accessible shopping experience for customers; as well as specialty stores covering different product categories such as home electronics, baby and maternity, fresh produces, and even automobile. Exhibit 1 highlights selected major retail formats operated by Suning.

To better integrate the online and offline consumption scenes, Suning revealed that it aims to establish more than 20,000 stores of different formats by 2020, up from around 4,000 today. Meanwhile, to accelerate the adoption of “Smart Retail” strategy, Suning has formed several strategic partnerships or investments with different enterprises over the past two years. Exhibit 2 shows some of the strategic partnerships or investments of Suning.

RT-Mart revamps business operations after being acquired by Alibaba

RT-Mart has also been actively reforming its business operations after being acquired by Alibaba in 2017. To recap, on 20 November, 2017, Alibaba Group announced to acquire a 36.16% stake in Sun Art Retail Group (which runs RT-Mart in the mainland China) for US$2.88 billion to expand in offline retail market. On 12 January, 2018, Sun Art Retail issued a public announcement stating that Taobao China Holdings and its concert parties had obtained 303,560 offer shares of Sun Art. Including the shares previously held, Alibaba is holding a total of 6.867 billion shares, representing approximately 71.98% of the total issued shares of Sun Art Retail. With the completion of the deal, RT-Mart and Auchan are now part of the Alibaba Group.

On 11 June, 2018, RT-Mart announced that 100 of its stores have been revamped and upgraded under Alibaba’s “New Retail” initiatives. According to RT-Mart, its store operating efficiency has increased by 15% after the store revamp. The revamp and upgrading of other stores would be completed by the end of 2018. Also, RT-Mart has been working with Alibaba’s Hema Xiansheng in fresh food business. On 2 June, 2018, RTMart and Hema Xiansheng jointly opened the first store of “Hexiaoma” (盒小马) supermarket in Suzhou.

Company snapshots

Suning Holdings Group

• Suning Holdings Group was founded in 1990 as a household electric appliance retail chain.
• Suning Holdings Group now operates various businesses across a number of industries. Its key businesses include Suning.com, Logistics, Financial Services, Technology, Real Estate, Media & Entertainment, Sports, and Investment.
• In 2017, the company ranked 2nd in the top 500 privately-owned enterprises list in China, with annual revenue reaching US$65.7 billion (412.95 billion yuan).
• The company was in the Fortune Global 500 List in 2017.
• In August 2015, Alibaba Group Holding invested 28.3 billion yuan (US$4.63 billion) for a 19.99% stake in Suning.com (formerly Suning Commerce Group Co., Ltd.) and becomes its second largest shareholder.

RT-Mart

• RT-Mart is a hypermarket brand under Sun Art Retail Group.
• Sun Art Retail Group ranked the 4th in the latest list of “Top 100 Retail Chain Operators in China in 2017” released by the China Chain Store and Franchise Association
• Sales revenue amounted to 102,320 million yuan in 2017, with gross profit of 24,674 million yuan.
• Currently, RT-Mart operates 393 branches in the mainland China.