Alibaba to take control of China's top hypermart chain for US$3.6 billion

Hong Kong

ALIBABA Group Holding will invest about US$3.6 billion to double its stake in Sun Art Retail Group, taking control of China's largest chain of hypermarts to try and fend off rivals such as JD.com in e-commerce's hottest growth arena.

Alibaba will raise its direct and indirect stake in the grocery chain to about 72 per cent by acquiring equity from Auchan Retail International, then make a general offer to shareholders to buy out the rest of Sun Art.

Sun Art's Hong Kong-listed stock leapt 30 per cent on Monday, its biggest intraday gain since 2011. Alibaba gained as much as 1.8 per cent to touch an intraday record.

The deal signals the intention of Asia's most valuable corporation to accelerate an effort to dominate one of Chinese e-commerce's largest untapped frontiers. Alibaba chief executive officer (CEO) Daniel Zhang has made expansion into physical retail and the grocery business a cornerstone of his growth strategy, an effort that paid off during the Covid-19 pandemic.

Sun Art already operates hundreds of hypermarkets across China under the Auchan and RT-Mart brands, a massive distribution and storage network that can supplement Alibaba's own efforts in fresh produce. The Chinese e-commerce giant is now grappling with intensifying competition from the likes of JD, food delivery giant Meituan Dianping and startups such as Tencent Holdings-backed Missfresh - all chasing a market for groceries and fresh produce that HSBC expects to grow 2.5 times to 690 billion yuan (S$140 billion) by 2022 from 2019. Alibaba was among the pioneers in that arena, announcing in 2017 it would spend about US$2.9 billion for a 36 per cent stake of Sun Art.

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The deal "suggests that the tech giant seeks to further expand its one-hour home grocery delivery services such as Taoxianda, leveraging the grocer's extensive offline hypermarts across China", Bloomberg Intelligence analyst Kevin Kim said. "This could capture consumers flocking to online platforms, further induced by Covid-19 early this year, yet may hurt foot-traffic to the grocer's physical stores."

Mr Zhang has been directly involved in the expansion into what the company calls its "new retail" strategy of combining e-commerce with physical stores. He helped launch a startup called Freshippo within Alibaba that aimed to combine a grocery store, a restaurant and a delivery app, a business that underpinned an overall new retail division that has grown into a US$12 billion operation, contributing a fifth of total revenue in the June quarter.

As Alibaba increases its stake to a majority, Sun Art's financial statements will be consolidated into the larger company's. Peter Huang, Sun Art's CEO, will add the title of chairman for the business.

The online groceries segment has leapt to the forefront during Covid-19 when shoppers shunned restaurants and physical stores, though the industry - which requires more complex logistical structures such as so-called cold chain storage - has proven difficult to crack in years past. BLOOMBERG