Tie-up between Alibaba and Tencent a wake-up call for ‘bricks and mortar’ retailers

Last week’s proposed merger between two of China’s leading consumer lifestyle sites was a wake-up call for firms that have yet to start an e-commerce platform in an economy where online transactions are tipped to total half of all consumer sales within seven years , experts say.

Consolidation is raising barriers to entry in China’s highly competitive and rapidly growing online-to-offline (O2O) sector, where cab-hailing mobile application Uber and other firms try to draw customers to physical services via the internet. That means new entrants better have deep pockets and a smart business plan.

Unless you have something special to offer, “a bricks and mortar strategy is basically dead in China”, said Shaun Rein, the Shanghai-based founder of China Market Research Group. And even then, O2O companies were still in cash-burning mode, “building market share but not generating revenues”, by subsidising services like a restaurant meal or cinema ticket to attract hits, Rein said.

Last Thursday’s deal was a case in point. Valued at US$15 billion or more, the tie-up unites Alibaba-backed Meituan.com with Tencent-funded Dianping.com to create a dominant O2O player in services such as finding online deals, as well as in the group buying of coupons and accessing of ratings.

The combined firm will now overshadow the sector’s third major player, the Baidu-owned Nuomi, which itself only recently unveiled plans to invest US$3.2 billion over the next three years, as it bids for a slice of an e-commerce market expected to grow from US$672 billion this year to US$1.97 trillion by 2019, according to eMarketer.

Unfavourable demographics and competition from e-commerce create worse than expected headwinds to conventional consumer bands/products and distribution channels

Jefferies analysts

The speed at which China’s e-commerce market has grown has not surprised onlookers who say consumers savour the convenience of online shopping and home delivery rather than having to deal with gridlocked streets and polluted air.

Chinese consumers bought 12.4 per cent of their retail products online last year. That number should rise to 33.6 per cent in 2019, forecasts eMarketer, and Rein predicts it may hit 50 per cent by 2022. By comparison, online retails sales in the United States, where retail space per capita is four times higher than in China, are expected to total just 9.8 per cent of total sales by 2019, barely budging from 6.5 per cent last year, eMarketer data shows.

Those numbers are translating into a lot of deal making. There have been US$58.4 billion of internet deals involving Chinese companies this year, already almost double the amount for the whole of last year, Bloomberg data shows.