Alibaba and Tencent may have their eyes on investing in the same global retailers, according to a pair of recent Bloomberg reports. First, the two Chinese tech giants were revealed to be considering bids to acquire a 10% stake in Hong Kong’s A.S. Watson Group. Then, Tencent was named as one of the parties interested in investing the Chinese business of German wholesale giant Metro, whom Alibaba was said to be in talks with last month.
As large retailers that have yet picked a side in the Alibaba-Tencent divide, Watsons and Metro China are rarities in Greater China.
The two company’s negotiations remain preliminary, and it’s possible that neither will progress beyond this early stage, but the situation is nevertheless interesting to consider in light of China’s broader offline retail market, where Alibaba and Tencent are increasingly at odds.
For the past few years, Alibaba and Tencent have embarked on an offline “acquisition war”, pouring money into major Chinese shopping malls, convenience stores, supermarkets, and the like.
The companies’ investment styles have varied, with Alibaba dropping serious money for large ownership positions, and Tencent opting mostly for smaller cash injections in exchange for minority stakes.
For Alibaba, the push into retail is part of its empire-building and ambition to shape the future of commerce on its own terms. Each investment into a mature offline retailer, and each partnership with newer retail projects, allows Alibaba to reach deeper into Chinese consumption and deploy its suite of solutions, including AliCloud, Alipay, Taobao Tmall, and supply chain services.
Yet retailers seem increasingly wary of Alibaba’s hold over their sector. Indeed, the conglomerate has already twice tried to acquire a stake in Metro China. Both times, the talks reportedly fell through over disputes of control, with Alibaba seeking to invest directly in Metro’s parent company in Europe, rather than only the Chinese unit.
At the same time, the “New Retail” strategy, officially set in motion by Alibaba two years ago to transform bricks-and-mortar vendors, has yet to fully offset the woes of traditional retail. For example, Taiwan-based hypermarket chain RT Mart did credit the significant contributions of New Retail to its business, but the 21st-century business model wasn’t enough to prevent its overall decline in performance. The same can also be said of supermarket chain Sanjiang Shopping Club, which Alibaba invested US$220 million into for a one-third stake in 2016.
In light of this, retailers may start to look for alternative benefactors beyond Alibaba, and Tencent’s philosophy of applying a lighter touch could be particularly attractive.
Tencent made a major play to enter Chinese retail in 2014 when it poured US$215 million into e-commerce company Jingdong (JD) for a 15% stake, which several months later was increased to 20% during JD’s IPO.
Since then, Tencent has made a series of investments into offline retail players with the strategic consideration of constraining and counteracting Alibaba’s dominance, rather than being driven strictly by the promise of financial returns.
Following this logic, Tencent’s investments can almost be seen as tit-for-tat, mirroring Ali’s acquisitions: JD to Suning, Yonghui to Hema, Carrefour to RT Mart, and BKK Electronics to China Yintai.
Recently, Tencent has also begun focusing on developing its B2B competencies—the traditional stronghold of Alibaba. This shift in direction was also partly in response to slowing growth in smartphone adoption in China, and growing risks with its consumer-facing entertainment platforms, particularly video games.
The new direction shone through in 2018 when Tencent announced restructuring and established its Cloud and Smart Industry Business Group (CSIG), whose mission is to develop and deploy information technology solutions across conventional industries, such as retail.
At the core of CSIG is Tencent Cloud, on which Tencent has packaged a suite of tools for merchants, including Enterprise WeChat, mini-programmes, as well as solutions for payments, analytics, and business intelligence.
Yet it may take some time before merchants adopt Tencent’s offerings. Migrating from cloud services is costly, and convincing merchants to adopt a new and unproven solution will be challenging. While investing into retailers gives Tencent an added opportunity to roll out its services, the smaller stakes it takes means it doesn’t have the same leverage as Alibaba to compel portfolio companies into using those tools.