M&A

Jack’s closing act

Alibaba acquires NetEase’s Kaola for $2 billion

Jack-Ma-w

Ma retired this week

In Finland, ‘Happy Hour’ isn’t just a marketing ploy for bars to sell more booze. Around nine o’clock every evening, S-market, a supermarket chain, offers deep discounts on hundreds of items that are hours from their midnight expiration dates in all of its 900 outlets. It’s part of the supermarket chain’s two-year campaign to reduce food waste.

Alibaba’s Hema Fresh should probably consider a similar strategy for China. That’s because last week, the artificial intelligence-powered supermarket chain came under fire when a shopper posted a video on weibo showing employees at a Hema outlet throwing away prepared food that looked perfectly edible and fresh. The video quickly went viral, with many netizens complaining that Hema was wasting resources and abusing the environment.

“There are many parts of the country that are very impoverished and struggle with food shortages. Even in the cities, a lot of people find it difficult to keep up with the high cost of living. So it is hard to imagine food that can be eaten is instead thrown away. That’s such a waste of resources,” one netizen lambasted.

In light of the controversy, Hema said in a statement that it has no choice but to destroy the food owing to food safety requirements. It added it has tried to minimise wastage but admitted that there is room for improvement.

Industry observers, too, argue that when it comes to food safety, destroying unsold food is not only the cheapest but also the safest practice. After all, supermarkets cannot sell expired goods.

While Hema was trying to extract itself from this PR mess, its parent Alibaba made yet another acquisition to expand its e-commerce footprint. Last week, the e-commerce giant announced that it had acquired NetEase’s Kaola for $2 billion. After the deal, Kaola will be integrated into Tmall, creating China’s largest cross-border e-commerce platform (on these sites Chinese consumers buy products from sellers in other countries).

At the moment, Kaola and Tmall Global are China’s largest and second-largest cross-border e-commerce platforms, respectively, holding 27.7% and 25.1% of the market in the first half of the year, according to data from iiMedia. Their merger will create a business far surpassing rivals like JD Worldwide, which ranked third with a 13.3% share, VIP International and Amazon China.

Still, the sale has caught many by surprise. With revenue from the gaming business slowing – traditionally the biggest sales generator for NetEase – e-commerce has been a rare bright spot for the internet firm (albeit controversies had dogged Kaola; see WiC438 and WiC446). In the second quarter of this year, Kaola saw its net income rise 20% to Rmb5.2 billion ($734.5 million). By comparison, profits for NetEase Games went up a lesser 13.6% during the same period to Rmb11.4 billion.

“If you’d asked anyone before August this year whether NetEase was looking to sell Kaola, they would think it was a joke. Since its inception in 2015, Kaola has maintained pole position in cross-border e-commerce in China,” observed 36kr, a portal.

However, e-commerce remains a pretty low-margin business. In the most recent quarter, Kaola’s gross margin was around 10.9%. Despite the decline in gaming revenue, ­­­gross margins for that business remained high at 62.8%.

“E-commerce is a money-burning business: all the logistics and warehousing are costly. There is also intense competition from Alibaba and JD.com. In the past two years, the growth rate has slowed and Kaola’s gross margin rate also remained only around 10%. By the fourth quarter, margins will take an even bigger hit because of Singles’ Day,” Sohu commented.

“Despite the fierce competition between Kaola and Tmall International, the latter has always focused more on the beauty sector while Kaola is known for baby and maternity care products. And because Kaola is the market leader in cross-border e-commerce, it already has a highly loyal user base. So all in all, the acquisition is a win-win on both sides,” reckoned TMT Post, a tech portal.

All told, it was an appropriate closing chapter in Jack Ma’s last week at the helm of Alibaba.


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