Breaking Down Tencent’s Investment Binge in Retail (Part 2)

Tencent appears to be doubling down on new retail as it recently embarked on a retail investment frenzy.

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Breaking Down Tencent’s Investment Binge in Retail (Part 2)

In the past three months, Tencent was on a shopping spree, making six investments in retail and its investees include brick-and-mortar chain stores, menswear brand and e-commerce website.

Many would wonder why does a social networking and game major bet on retail, and also what is Pony Ma, Tencent founder and CEO, going to do with these new and diverse partners?

This is the Part 2 of a 2 Part-Series. After breaking down Tencent’s recent investment frenzy in Part 1, we continue to explain what is Tencent’s next step in retail with its new partners. 


What’s Tencent’s next step?

Cooperation with Yonghui Superstores in retail industry

Image credit to 123rf.com.cn.

The foundation of business is retail, while the foundation of retail is supermarkets and department stores. Therefore, it’s a matter of time until Tencent competes in the retail industry.

Tencent usually puts its investment focus on fields like online games, culture and entertainment, transportation and intelligent hardware, with involvement in e-commerce, tourism, finance, and education. It now positions offline retail as a new priority of investment with clarified purpose, plan and method after entering the era of new retail.

Then, it’s worth noting that when Tencent made investments in an unfamiliar industry, it would find a company to be its agent, or, specifically, partner, aiming at assisting it in realizing its business plan.

Tencent has mainly invested in fields like online games, culture and entertainment, transportation and intelligent hardware, as said before. Thus, when it comes to sectors it is not familiar with, the company will find some investees and have these partners to be responsible for specific management and operation.

For example, as Tencent planned to march into e-commerce, it made an investment in JD and then the cooperation achieved mergers and acquisitions against several vertical e-commerce platforms, including MissFresh, an O2O e-commerce platform providing fresh food retail, FriutDay, an online fresh fruit retailer and Yihaodian, an online grocery retailer.

Entering the era of new retail, Tencent chose Yonghui Superstores to be its partner. As with e-commerce, the company will empower its partners if it is lack of the ability to get access to an industry and operate the business on its own.

In fact, Tencent doesn‘t occupy a complete chain of new retail, including necessary involvement from consumer, brand, procurement system, operation standard, brick-and-mortar stores, customer service, trading platform, payment system, logistics, big data and cloud computing.

Having in its arsenal only part of the key technologies, Tencent has to go down the path of aggressive acquisition as part of its push to build a full new retail chain, plugging its holes through established companies in the retail world.

Image credit to 123rf.com.cn.

Needless to say, Tencent’s investment in Yonghui Superstores is a pretty smart one as Yonghui Superstores, as an outstanding player in the retail arena, could really help to further its ambition in the retail world. The fusion of the two represents the consolidation of internet technologies with the operation of brick-and-mortar retail business.

As a king in the internet world, Tencent sits on a staggering amount of capital and a slew of internet technologies, while Yonghui Superstores carries with it established supply chain and a pool of proven techniques for the operation of brick-and-mortar stores. By partnering up, the two will be reshaping the brick-and-mortar retail business. This indeed is a welcome change for both of them.

The role Yonghui Superstores plays in the Tencent deal is reminiscent of Alibaba’s positioning for Hema Fresh, a combination of supermarket and restaurant, in its new retail drive.

Diversifying Tencent’s portfolio by straying into the retail world

Ok, enough about all the analysis, I’ll now shift gears a little bit to the fundamental questions that we’ve failed to touch upon earlier. Why would Tencent, all of a sudden, dive into brick-and-mortar retail? And why would it choose to extend into brick-and-mortar retail through buying stakes, AND minority stakes?

Well, this comes down to the fact that Tencent has now awoken to its disadvantages.

Video games currently are still Tencent’s main engine for cash flow, and WeChat is, beyond any question, its flagship product. Except for mobile numbers, WeChat now enjoys the most users in China, which in total has 1.3 billion people.

Nevertheless, WeChat also sees its concern as its expansion.

With nearly 900 million registered users in China, the main challenge now facing WeChat is how it can maintain and leverage that asset.

To that end, WeChat aspires to introduce scenarios that could deliver the offline experience for its users, establishing a new linking path, which goes “people-scenario-people”, to strengthen its position as the top mobile platform in China.

The mini-programs are a fruit of that thinking and the “first demonstration” of Tencent’s attempt to spill over into the new retail arena. Whereas, the mini-programs, which are essentially a box of tools, cannot, in any way, substitute for scenarios. For delivering offline experiences, there is no better way than veering towards offline scenarios.

A Boy playing WeChat Mini Porgram-based game. Image credit to 123rf.com.cn.

Read more: Didi & Ofo Investor Bets on WeChat Mini Program-based Service Provider Aldwx.com

Only by blending offline transaction scenarios can Tencent make more out of its existing asset.

This explains why Tencent has chosen to bring those retail companies “under its wing” and why it only took some minority stakes in them.

A harmonious bond removes the hurdles for deeper cooperation on different kinds of businesses and Tencent’s insecurity about the other side’s singing a different tune.

Taking only some minority stakes is Tencent’s gesture of reassuring the other side that “Tencent has no intention whatsoever to dent its dominant position”. A proportion of stakes over 10% is a really big deal, because it meets the threshold for admission to the board of any company.

Still, the question of “why Tencent would, all of a sudden, stray into the brick-and-mortar retail world?” can’t be fully explained without stressing the following point.

Clearly, Tencent’s strength in big data and cloud computing needs no further emphasis. However, Tencent’s strength in these areas could easily be dwarfed by that of Alibaba without the backing of applications in real-life transaction scenarios.

And this disadvantage could linger well into when Tencent looks to develop such infrastructural technologies for the next-generation internet as Internet of things (IoT) and artificial intelligence (AI).

Tencent has, up to date, pumped money into hundreds of retail companies, which include the popular e-commerce companies like Xiaohongshu (literally “Little Red Book”, a cross-border e-commerce company), Pingduoduo.com (a company specializes in social commerce) and MissFresh (an e-commerce company that offers high-quality fresh goods). Alibaba is now charging into the retail world with full momentum, while Tencent, after two years of observation, had finally made its move in that direction in 2017. The rule of the game is simple: whoever takes the more retail companies enjoys a wider application of its technologies, thus gaining an upper hand when the next technological revolution comes.

As you can see, the amount Tencent invested in these retail companies is not that much. So its retail ambition is actually achieved by doling out small money.

Well done, Tencent!

In the end, let’s take a look at the top ten retail chain operators in China (the data is taken from the Top 100 Retail Chain Operators in China 2016.).

China Resources Vanguard(No.3), RT-MART(No.4), Walmart(No.5), Lianhua Supermarket(No.7), Yonghui Superstores(No.10), Carrefour(No.11), Better Life Commercial Chain Store (No.16), Wuhan Shanglian Group(Wuhan Zhongbai)(No.18), Wumart(No.19), SPAR(No.25)

Obviously, the retail chain operators have largely been snapped up in the last year, it seems that there are not many left for the two internet titans to continue their “shopping spree”.

Read more about the new retail:

Tencent, JD Invests in Wanda’s Shopping Malls for $5.4B, A Second-time Charm?

Tencent Invests in Carrefour China to up Competition with Alibaba on New Retail

Tencent Acquires 5% Stake in Menswear HLA, Branching out to Beachhead in New Retail

Alibaba Just Ordered a Takeout for its New Retail Future

Writer: WAN Deqian

This is the Part 2 of a 2 Part-Series. Link to the Part 1.