At a time when many malls are short of traffic, shops are closing and retailers are going bankrupt, JD.com surprised the e-commerce sector last week by completing the purchase of white goods retailer Five Star Appliance for Rmb1.5 billion ($208 million).
JD.com already owned 46% of Five Star, acquiring the remaining stake to broaden its offline sales channels. Earlier this year, the e-commerce giant bought $100 million worth of convertible bonds from Gome, one of China’s largest sellers of electronic goods and appliances. There have been other investments in mobile phone and accessories retailer D.Phone, as well as in Lenovo’s smart retail unit Lecoo.
JD.com and Five Star first linked up in April 2019, when the e-commerce giant purchased a stake in the Jiangsu-based retailer for Rmb1.3 billion. Founded in 1998, Five Star Appliance has more than 700 stores, although sales stalled again last year, dropping 4% compared with a year before to Rmb12.5 billion.
“Many of Five Star’s stores are concentrated in Jiangsu province, where consumer spending power is relatively high and the retail industry is well-developed. At the same time, it also has a presence in third- and fourth-tier markets. Coupled with JD.com’s strong buying power and logistics infrastructure, it can quickly expand in these places,” Chen Tao from Analysys, a market research firm, told Securities Daily.
The combination of the two retailers saw Five Star direct more than 500,000 of its customers to its e-commerce partner, while JD.com has contributed Rmb300 million in sales to the retail chain over the least year, the companies claim.
Proponents of the tie-up also argue that the physical experience of shopping, with face-to-face service, helps to spark spending on higher-end goods. “I have a friend who saw a cheap Xiaomi TV online so I introduced him to the store to have a look. After going to the store, he not only bought a TV but also a Casarte [a brand from Haier] refrigerator and a washing machine – products worth more than Rmb30,000,” Pan Yiqing, an analyst, told Leju Caijing.
JD.com has run a few experiments of its own in bricks-and-mortar retail. But the self-created stores have underperformed. “Although JD.com’s physical stores have been in business for many years, the actual effect hasn’t been satisfactory. A lot of consumers complain that their offline store brands are confusing and the management is messy,” commented the China Household Electrical Appliance Association.
JD.com’s swoop on Five Star is consistent with the wider trend of e-commerce firms expanding into offline markets. The strategy is based on providing an “omni-channel” experience for customers, as well as capitalising on the warehousing and logistical capacities of the more traditional retailers.
Last year Suning, backed by Alibaba, bought an 80% equity stake in Carrefour China, as well as 37 department stores from Dalian Wanda. Pinduoduo, another huge online sales platform, joined JD.com in subscribing for $200 million convertible bonds in Gome as well.
“Alibaba, JD.com, Tencent and Baidu have all been expanding their footprint offline. In the last two years, the e-commerce firms have mainly targeted consumer appliances and fast-moving consumer goods. Through further capital injections, the trend of increasing their influence in the offline market and fully integrating it with their online businesses has become even more obvious this year,” reckons Li Chengdong, an angel investor.
Others are more sceptical that the Five Star deal will bring significant growth for JD.com, however, following years of decline in its share of retail sales. “Only time will tell whether Five Star Appliance is a scrumptious cake or an unpredictable trap,” the China Household Electrical Appliance Association opined.
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