China Online Outfits Invest Billions Offline

Facing increased competition and slower sales growth, China's largest Internet companies are spending billions to ramp up a business strategy known as online to offline, or O2O, retailing.

Online to offline is expected to figure heavily in the future of retailing and consumption in China. It's seen as a better way for China consumers to research and buy goods, and receive them quickly, with smartphones playing a key role through search and payment apps.

Investments in O2O strategies include the $4.6 billion that e-commerce giant Alibaba Group (BABA) is paying for 20% of Suning Commerce Group, one of the largest consumer electronics retail chains in China. Also this month, JD.com (JD), which operates an e-commerce platform comparable to Amazon.com (AMZN), said it will invest $700 million in supermarket chain Yonghui Superstores for a 10% stake.

Baidu (BIDU), China's dominant search engine, said in June that it would spend $3.2 billion over the next three years to boost its O2O infrastructure and services.

At a time when sales at U.S. retailers such as Best Buy (BBY) are being hurt by Amazon and other e-commerce companies, China Internets are embracing the brick-and-mortar retailers as a way to boost customer service and increase sales, using multiple channels and promotions.

China's Retail Future

The O2O partnerships in China have been multifaceted long-term investments. Part of the strategy involves attracting customers online, then directing them to physical stores and service centers. The partnerships also involve companies working together on integrating e-commerce platforms and logistics, in part to provide speedier delivery or in-store pickup. And they typically include exclusive partnerships with retailers and brands.

"Online to offline is expected to create a significant opportunity to increase sales in the years ahead," said Henry Guo, an analyst at Summit Research Partners. "It will also give small companies more opportunity to grow.

Part of the O2O planning is developing mobile apps with retailers large and small, for example, to bring local merchants and restaurants into an interactive, full-service marketplace, connecting people in multiple ways to the goods and services they desire.

Delivering The Goods

As part of Alibaba's investment in Suning, it gets access to one of the largest consumer electronics retail chains in China, with more than 1,600 stores.

One part of the arrangement is that Suning on Tuesday established an online flagship store on Alibaba's business-to-consumer e-commerce platform, called Tmall. The two will also partner on expanding e-commerce platforms and logistics, with the goal of two-hour delivery for purchases made by consumers.

Combined, the two companies will cover almost all of the more than 2,800 counties and districts in China. Suning also has more than 3,000 after-sales service locations and over 5,000 affiliate servicing partners.

Suning's retail footprint across China means that customers can search products on Tmall and then physically examine them in stores before buying. They can also get after-sales services.

As part of the arrangement, Suning will invest up to $2.28 billion in newly issued Alibaba stock.

"We are seeing the integration of e-commerce with traditional commerce where consumers are able to enjoy a more engaged, omni-channel and seamless shopping experience," said Alibaba CEO Daniel Zhang, in a statement when the deal was announced Aug. 10.

Try Offline, Buy Online

Combining Suning's bricks-and-mortar assets with Alibaba's 307 million mobile users, consumers can have an in-store experience to view and try products with the option of ordering and making payments on their mobile device. They can also buy merchandise online but pick their orders up at physical shops so they don't have to wait for delivery.

"It provides Alibaba and Suning multiple channels to service their customers," Guo said.

Alibaba made an earlier O2O bet in March 2014 when it invested $692 million in Intime Retail Group for a 9.9% stake in the department store chain. Intime operates more than 36 department stores in China. The two previously teamed up with Alibaba e-payment affiliate, Alipay, to offer shoppers cashless payment using their mobile phones at Intime stores. Customers will get online promotions and other membership benefits at Intime stores by using their smartphones at the stores.

JD.com Takes Home Groceries

JD.com greatly expanded one of its O2O operations when it invested $700 million in Yonghui Superstores, a large supermarket chain with more than 350 stores. JD and Yonghui plan to jointly strengthen their supply chain management capability and will explore new online-to-offline opportunities.

Where Yonghui does not have stores, JD can offer an online ordering platform for supermarket goods with the network to deliver them.

"There will be a lot of areas for potential collaboration," Haoyu Shen, CEO of JD.com unit JD Mall, said of the deal in a conference call after JD reported earnings on Aug. 7.

In May, JD led a $70 million investment round in FruitDay, a Shanghai-based importer of fresh produce. FruitDay already sells fresh fruit on JD.com and will use the funds to expand its storage and delivery infrastructure.

Baidu Brings Merchants Online

Search-engine leader Baidu plans to use its $3.2 billion investment in O2O to expand operations of Nuomi, an online to offline platform it acquired for $160 million in 2014. The plan is to connect merchants and consumers through Nuomi. This includes helping merchants build their own marketing tools to attract consumers. The Nuomi platform will also be integrated with the merchants' point-of-sale systems, so that users can pay for goods with prepaid cards linked to the app.

"Going from connecting people with information to connecting people with services is a major transition," said Baidu CEO Robin Li, when the investment was announced in June. "Such a transition requires determination, and it comes with costs.

After Baidu's weaker-than-expected Q2 earnings on July 27, Summit Research's Guo said that "the profitability drag due to O2O investment to Baidu financials will span multiple years.

Tencent Holdings (TCEHY), which is dominant in mobile games, social networking and instant messaging, has also made various O2O forays. It owns a stake in JD.com and also Craigslist-like 58.com (WUBA). One year ago Tencent and Baidu entered into a partnership with Dalian Wanda, one of China's largest property and entertainment conglomerates, to create online to offline platforms. The deal will enable users of Baidu and Tencent apps to find information about Wanda's luxury hotels, shopping malls and movie theaters. The platform will give mobile Internet users the ability to search for a nearby product or service, find a place that offers it and make the purchase.

The deal also gives Tencent the ability to expand its online payment services into the new e-commerce company and Wanda's existing properties. This includes WeChat Payment, which is linked to Tencent's popular mobile messaging app WeChat. Tencent will also get access to movie, TV, and online dramas that Wanda owns.

Tencent said at the time that the joint venture "underscores Tencent's commitment to enriching our O2O ecosystem and delivering superior experience to our users through connecting them with goods, services and businesses."