Key highlights

On 28 May, 2017, Alibaba Group Holding Limited announced that it is acquiring an 18% stake in Lianhua Supermarket Holdings, an affiliate of China’s leading retailer Bailian Group. Alibaba will acquire a total of 201.53 milion shares of Lianhua Supermarket from Shanghai Yiguo E-Commerce Co., Ltd., a fresh food e-commerce company, to become Lianhua Supermarket’s second largest shareholder, according to a stock exchange filing from Bailian Group. The deal will be subject to domestic regulatory and shareholder meetings’ approvals. The deal could be worth US$100.33 million according to Reuters’ calculations.

As per Alibaba’s announcement, the two parties are laying out specific plans for future business collaboration. They would leverage big data capabilities to build “smart stores” and achieve integration across bricks-and-mortar stores, merchandise, payment tools, logistics and membership with the aim to deliver a better overall customer experience across each other’s ecosystem.

Shanghai Yiguo E-Commerce Co., Ltd. also agreed to sell 22.39 million shares, or about 2% stake of Lianhua Supermarket, to Bailian Group. Shanghai Yiguo E-Commerce Co., Ltd. will still hold about 1.17% stake in Lianhua Supermarket to complement each other in terms of supply chain and logistics operations.

Comments and implications

The announcement came after the signing of a strategic partnership with Bailian Group in February this year. In our view, Alibaba’s move to tie with Lianhua Supermarket is an extension of the Alibaba-Bailian partnership to drive the use of big data to improve and profit from brick-and-mortar sales under Alibaba’s “New Retail” vision. Alibaba’s “New Retail” concept highlights the importance of online and offline integration, logistics and data in shaping the future of retail. Alibaba has already expanded its involvement in offline retail businesses by forming strategic cooperation with Bailian in February 2017 and announcing the privatization of Intime Retail Group in December 2016.

Fung Business Intelligence believes that this is another strategic move for Alibaba to strengthen its market position in the supermarket sector. Lianhua Supermarket operates three major retail formats, including hypermarkets, supermarkets and convenience stores under the brand names of “Century Mart”, “Hualian Supermarket”, “Lianhua Supermarket” and “Lianhua Quik Convenience Store”. As of December 2016, Lianhua Supermarket has more than 3,618 physical outlets in 19 provinces and municipalities, of which, more than 60% of the stores are in Shanghai. The initiative is also a strategic move to better compete with JD.com in the supermarket segment, as JD.com has invested 4.3 billion yuan for a 10% stake in Yonghui Superstores back in August 2015. In June 2016, Wal-mart sold YHD, its online grocery marketplace, to JD.com, which further strengthens JD.com’s leading position in the online supermarket segment.

For Lianhua Supermarket, it has been putting a lot of efforts in exploring innovative ways to promote the upgrade and transformation of its retail outlets since 2016. It has revamped its fresh food procurement system and expanded sourcing channels to enrich its fresh food offerings. The company has also been actively carrying out omni-channel strategies by partnering with O2O platforms for home deliveries, providing pick-up services in-store for online orders, developing its own B2C platform, etc. According to Lianhua Supermarket, over 500 stores in Shanghai are involved in these O2O strategies and achieved total sales revenue of over 100 million yuan. After the acquisition, Lianhua Supermarket will be able to leverage Alibaba’s Big Data capabilities to streamline its fresh food supply chain. This will enable Lianhua Supermarket to roll out its O2O strategies more effectively and deliver better service to customers.