JD.com looks to rival Alibaba’s physical presence

Leading online retailer pays $190 million for a 46% stake in China’s third-largest electronics retailer as it aims to strengthen its physical network in its battle with its bigger rival.

JD.com said on Thursday that it will invest Rmb1.27 billion ($190 million) in China’s third-largest electronics retailer as part of a broader effort to bolster its physical presence in third- and fourth-tier cities.

The Nasdaq-listed e-commerce firm said it will acquire a 46% stake in Jiangsu Five Star Appliance, commonly known as 5Star, from real estate developer Jiayuan International, becoming its second-largest shareholder. Jiayuan, which is also based in Jiangsu province in eastern China, remains the largest shareholder with a 47% stake.

Hooking up with 5Star is the latest move by JD.com, China’s second-largest online retailer by revenue, to build a physical network to compete with larger rival Alibaba, which started extending its online sales through physical stores as early as 2015. 

In that year, the Chinese e-commerce giant paid $4.6 billion for a 19.9% in Suning Appliance, the country’s largest electronics retailer, and subsequently bought shopping mall operator Intime Retail for $2.6 billion two years later.

Physical stores are a fast-growing source of revenue for major e-tailers globally, who see it as means to broaden out their ecosystems, keep a lid on shipping costs, and potentially take a bigger bite out of the fashion market, among other things. US giant Amazon, for example, last year launched its brand of cashier-les grocery store – Amazon Go – having bought Wholefoods in 2017. 

By comparison, JD.com started building its physical network in 2017 and has been expanding only under its own brand, so progress has been much slower.

It appears to be a win-win situation for both JD.com and 5Star. While the e-commerce giant can tap into 5Star’s existing network, the Jiangsu-based retailer can also use JD’s powerful online sales channels to diversify its sales.

For JD.com, 5Star is arguably the best choice available. That's because Alibaba has already partnered with Suning Appliance and the outlook of Gome Electrical Appliances, another major electronics retailer, remains uncertain with its founder imprisoned until 2021. Huang Guangyu, who founded Gome at the age of 36, was sent to jail in 2010 for market manipulation.

As of the end of last year, Suning was China’s largest non-internet electronics retailer with a 17.5% market share, followed by Gome at 9%, according to China Testing & Inspection Institute for Household Electric Appliances, a think tank under the central government. 5Star was the third-largest with a 2% market share.

5Star operates 220 electronics stores across seven provinces, mostly in the eastern coastal areas of China. It is gradually expanding its presence in southwestern China, including the provinces of Sichuan, Yunnan and Henan.

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