Tencent Puts Huge Investment in YH Super Species, Strategic Challenge to Alibaba’s Hema

Alibaba is aggressively deploying its new retail business. Fresh Hema has established the entry barrier in terms of business model. JD.com and Meituan are both making small steps forward. This collaboration between Tencent and Yonghui will be a new variable for the industry.

With the successive entry of Internet tycoons, the war in supermarket and retail industry is sparkling.

Reporter received the information from an exclusive source that Tencent (00700.HK) has put heavy investment purchasing shares of Super Species, the fresh grocery store under Yonghui Superstores (601933.SH). The deal has now been closed and is supposed to be announced in the next two weeks. This is an important strategic investment Tencent has made in retailing, though the actual share and estimated value remain unknown. Yonghui Superstores has a current market value of 84.6 billion. Its collaboration with Tencent this time may disturb the competitive landscape of new retail and supermarket industry.

From someone close to this deal the reporter got the information that Tencent has been participating massively in new retail projects since second half of this year. And the rapid growth of Hema Store has especially stimulated the acceleration of Tencent’s progress. The above mentioned source states that this time’s purchase of shares by Tencent has two implications, the first being an offline fresh food store deployment to challenge the Fresh Hema, and the second being Tencent’s effort in building samples to reform its underlying technology, in order to test Tencent’s retailing solutions.

Fresh food is an industry of trillions dollar scale, and fresh food offline market has huge potential for transformation. This is a market both Internet tycoons and capital giants are looking at avidly. Among them Alibaba has been the most aggressive one. In 2017 Alibaba has invested hugely in the three main areas of operation in retailing – opening of 20 physical Fresh Hema Stores, retailing department enabling 600 thousand offline stores, and invested in regional retailers like Sanjiang Shopping, Lianhua Supermarket and New Hua Du. In November 2017, Alibaba became second largest shareholder with 36.16% share of Sun Art Retail Group, the largest retailer in China.

Jack Ma & Fresh Hema Store

Many business insiders reckon that Hema Store has already established this entry barrier with its experimental supermarket transformation mode. A top management in supermarket and retailing told Caijing reporter that the alchemy of this business mode is its system in integrating online and offline. Most of them are Hema patents and are hard for competitors to copy. After Alibaba becoming a shareholder of Sun Art Retail Group, Daniel Zhang has publicly stated that Alibaba’s strategy is to test this new retail mode in local supermarkets, and then apply it to larger supermarket groups, which means Hema business mode will be introduced quickly to the 454 supermarkets under Sun Art Retail Group.

Thus if Tencent still has no operations in retailing, the supermarket payment terminals, data input as well as volume flow will be influenced by the ever growing new retail business of Alibaba.

Tencent has always been in search for suitable object to invest within and outside of the investment system. Caijing reporter had the information that Tencent had heavily supported Meituan in its deployment in offline supermarkets; however, other than retail, Meituan has another business focus in 2018 which is online car-hailing. Currently Meituan is making slow progress in fresh food market with its Zhangyu Store, which has seen so far only one physical store in Beijing. According to a business insider close to Zhangyu, the store has not been part of part catering industry, with its low share of fresh food. This store is still testing the physical store business mode. And JD.com, in deep collaboration with Tencent, is planning the yet-launched JD.com fresh food store 7Fresh.

YH Super Species, with its established framework and expanding mode seems to be Tencent’s best choice in the current stage.

Super Species is launched on 1st of January this year by Yonghui’s subsidiary “Yonghui Yunchuang”. According to the announcement previously published by Yonghui, Yonghui Yunchuang has a registered equity of 1 billion, with Yonghui Superstores holding 52% of the shares, and Capital Today holding 12%. Yonghui Superstores employs a hybrid operation mode of “high-end supermarket + fresh food restaurant + O2O”, which is similar to Hema Store. Super Species has entered 6 cities so far with 17 physical stores. By end of this year another 6 store are expected.

On the one hand, Hema Store has higher online sales than offline, while Super Species has heavier offline operations, and is more of a combination of offline business with “restaurant + fresh food + supermarket”. Thus the investment from Tencent may accelerate its online development and optimize its digital capabilities. On the other hand, Super Species will be Tencent’s testing solution in offline retail. WeChat as the biggest social networking system, is capable of connecting all members, payment and information flow in all online and offline retailing scenarios. This means WeChat will be a full-package solution and data centre in all stages of the consumer journey, and Super Species is the foothold for this solution. This is an advantage Alipay, with no social media and social networking users base, does not have. However, the final result of this transformation is yet to be seen.

Retailing is a battle of long term. From Paipai, Yixun, JD.com, to Koudai,Tencent has proved with past experience that it has never withdrawn from the race in retailing, whether by participating itself or by investing in other players. The core reason being that, Tencent is the centre for data flow, and is always looking for channels to convert it to sales. Advertising, video games and ecommerce are currently channels for this conversion. And in the long term, retailing could be the channel. Meanwhile, the social centric data can be combined with external data in retailing.

A retailing industry investor pointed out that, Tencent’s investment in YH Super Species may accelerate the latter’s expansion and technology transformation, which will constitute a challenge to the Fresh Hema Store in certain regions and on certain scales. However, Hema has already gone through the testing phase, and has completed the reconstruction of human, goods, and platforms driven by big data. At the same time, the industry is still having doubts about whether Super Species is a supermarket with Internet mindset, and about Tencent’s operation capabilities in retailing. The reform of underlying technology as infrastructure may not have an instant effect.

On this transaction, Yonghui Superstores responded that please refer to the official listing statement. And Tencent has made no remarks so far.

This article originally appeared in Caijing and was translated by Pandaily.