January 10, 2017 / 8:22 AM / 6 months ago

Alibaba's new brick-and-mortar bet looks pricey

3 Min Read

Founder and Executive Chairman of Alibaba Group Jack Ma attends the opening ceremony of the third annual World Internet Conference in Wuzhen town of Jiaxing, Zhejiang province, China November 16, 2016.Aly Song

HONG KONG (Reuters Breakingviews) - Alibaba shareholders are getting another serving of bricks and mortar. The Chinese e-commerce giant is upping its stake in struggling mainland department store and mall operator Intime Retail, teaming up with founder Shen Guojun to offer to take the firm private for $2.6 billion.

The bid for the remaining 63 percent of Intime carries a generous 52 percent premium to the Hong Kong-listed company's average price over the last 90 days. That's twice the average four-week premium for similar retail bids in Asia, Thomson Reuters data shows. Intime's beat-up shares soared 35 percent in response.

Full control, minus shareholder nagging, could allow Alibaba to boldly experiment with "online to offline", or O2O, shopping using Intime as a test bed. For example, instore customers could try out samples at a store, then order quickly and cashlessly for delivery using Alibaba's mobile apps. Conversely Intime can sell inventory online via Alibaba's platform.

The idea is similar to what Amazon is toying with its Amazon Go store concept, except that instead of a testing one prototype cafe, Alibaba is buying 29 department stores and 17 malls, most in Zhejiang province where Alibaba is headquartered.

For all the hype about China's online revolution, more than 80 percent of physical products are still sold at stores, not websites. Alibaba can hardly get much more dominant on the domestic internet, but if the boundaries between physical and e-commerce are really as blurry as it claims, this could open up a new avenue of growth.

But Chinese retailers struggle with many costs that O2O can't fix: stratopheric rents for desirable locations, for example. Culture is a challenge too, since many young Chinese honestly prefer shopping on screens, and are unwilling to pay a premium to buy in person. First-half earnings at Intime fell 21.3 percent year-on-year to 561 million yuan ($81 million). Alibaba's investment in Suning, another physical retailer, is under water. And it is not clear why Alibaba needs to buy a retailer, rather than enter into commercial agreements, for this experiment.

Customer demand for O2O concepts has yet to be thoroughly tested; it could be the Next Big Thing, or a niche. If Alibaba is wrong, shareholders are left with expensive stores stuck in a losing battle with Alibaba itself.

($1 = 6.9245 Chinese yuan renminbi)

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