Alibaba Makes Bad Buy With Department Store

Includes: BABA, INTIY
by: Doug Young

E-commerce leader, Alibaba clearly has far too much cash and doesn't know what to do with it. That's my best explanation for its purchase of a stake in department store operator Intime Retail (OTC:INTIY, HKEx: 1833), the latest acquisition in a supercharged buying spree over the last year. I'm personally quite puzzled by this latest deal, as it seems to contradict Alibaba's mantra that it's different from all of its rivals because it doesn't own any actual retail businesses. Instead, the company has risen to prominence by operating online shopping malls that are populated by other retailers, which pay rent and other fees to Alibaba.

According to the latest reports, Alibaba will pay nearly $700 million for 9.9 percent of Intime (company announcement; English article). That price will also see Alibaba receive bonds that could boost its stake to 35 percent, if they are converted into Intime shares in 3 years. Intime operates a chain of 36 department stores across China. The companies said the partnership is designed to help Alibaba build up its online-to-offline (O2O) business that combines virtual shops with traditional brick-and-mortar stores.

I have so many questions and doubts about this latest deal, that I'm not sure where to begin. For starters, Intime certainly doesn't look like a major player if it only has 36 stores in China. That makes it difficult to see why Alibaba would choose such a target if it really wants to explore traditional retailing. But more importantly, I don't see how Alibaba will benefit from this alliance, since it doesn't sell any merchandise directly. Therefore, it can't really offer any synergies except to give Intime space in one of its online malls.

Alibaba certainly isn't the first e-commerce company to explore the O2O space, which is supposed to combine the strengths of online and offline retailing to create a stronger product than either can offer individually. Earlier this year, Internet giant Tencent (OTCPK:TCEHY, HKEx: 700) formed a partnership with Beijing-based department store operator Wangfujing, seeking to leverage Tencent's popular WeChat instant messaging platform (previous post).

Suning (Shenzhen: 002024) is also experimenting heavily in O2O by combining its older brick-and-mortar electronics stores with its newer online business. One of my favorite deals in the space came just last month, when IPO candidate formed a tie-up with a major convenience store operator (previous post). But in that case, the deal was targeted at improving's product delivery by giving its customers the option of picking up their online purchases at convenience stores.

By comparison, I really don't see how this newest tie-up will benefit either Alibaba or Intime, unless Alibaba changes its mind and decides it wants to get into the business of selling its own merchandise online. I don't see that happening anytime soon, even though Alibaba's position as a mall operator is undermining its competitive advantage to rivals who sell their own merchandise and therefore have more control over product quality and deliveries.

So, what's behind this latest purchase? As I've said above, I suspect that Alibaba simply has too much cash, and is looking for ways to spend it. In the last year alone, the company has spent more than $2 billion on a wide range of purchases in areas ranging from social networking to mobile mapping and film production. In this case, it is also feeling a need to explore the O2O space, even though that may not be well-suited to its business model. This tie-up is likely to flop over the long run, though that probably won't matter much to a company of Alibaba's size. The bigger danger is distraction and lack of focus that will come with all of this diverse M&A, which could ultimately undermine Alibaba's core business of operating online shopping malls.

Bottom line: Alibaba's purchase of a major stake in brick-and-mortar department store operator Intime makes little strategic sense due to lack of synergies, and is likely to flop.

Disclosure: No positions