Alibaba Said in Talks to Buy Stake in German Retailer Metro’s China Stores

Alibaba is in talks to acquire a portion of the China operations of German retailer Metro, according to a Thursday report by Reuters, as the company that handles nearly 60 percent of China’s online shopping continues to look for ways to own more physical stores.

Should the Chinese e-commerce giant follow through on the potential transaction it would give Alibaba a share of the Düsseldorf-based group’s 94 wholesale outlets across China.

The report of the potential Alibaba investment follows more than $6 billion worth of investments by top Chinese e-commerce players in offline retail in the past year, as the country’s Internet giants compete to extend their dominance into China’s $500 billion offline market grocery sector.

Metro Shopping for Mainland Partners

This latest account of a potential investment in Metro’s mainland operations follows a January 31 report in which Bloomberg said the group was considering selling a majority stake in its China division but would maintain “significant” minority participation in the unit.

The talks are said to still be at an early stage, and the report of Alibaba’s involvement follows reports of similar discussions between Shanghai’s Fosun Group and Metro last year. The Reuters report indicated that the Alibaba investment is not certain, and that it is possible that no agreement may be reached.

Metro’s mainland China outlets represent 67 percent of its total stores in Asia, where it generated approximately €4.3 billion in sales last year, according to its first 2018 quarterly report. Pan-Asia sales for the firm dropped 5.7 percent to €1.038 billion in the first quarter of 2019.

The offline offshoots by China’s Internet titans have been closely watched by retail analysts, with Morgan Stanley noting in a report this year that these multi-channel retailers in China carry a different cost structure than their pure-play offline peers, with the acknowledgement that delivery efficiency will be crucial to the profitability of their retail strategy,

Alibaba Goes Shopping Offline

Should Alibaba take a stake in Metro’s China stores it would be attempting to fit the wholesale markets into an expanding universe of offline outlets in mainland China.

Alibaba’s push into the offline world, where about 80 percent of retail sales are still made, has been in the making for at least two years since the firm announced a $ 2.9 billion stake in China’s largest hypermart operator Sun Art

In April of last year, Ma’s company announced it had signed a cooperation agreement with five of the top ten developers in China, including China Vanke, Evergrande and Country Garden to help it secure new locations for its supermarket Freshippo’s ( known in China as Hema). That same month the company announced its aim of opening 2000 of these high tech outlets across China in the next three to five years.

Alibaba’s offline strategy is finally starting to pay dividends, as more and more of its Freshippo stores (known as Hema in China) break even, and the firm has wrapped up renovations on close to 400 Sun Art stores, according to Morgan Stanley’s February report.

Investors, however, are still taking a wait and see approach, assigning little value to Alibaba’s nascent businesses including retail. Ant Financial and Alibaba Cloud are still the two units  “most likely to move the needle in the foreseeable future.,” according to a UBS report this month.

Shares in Alibaba, up 23 percent since January, remained steady in the hours after the report, even as major American hedge funds including Jana Partners, Third Point LLC, Soros Management, Tiger Global Management, and Appaloosa, sold out or reduced their positions in the NYSE-listed firm.

Staying Ahead of Tencent and JD

Two weeks after Alibaba announced its partnership with the ten mainland developers last April, JD.com CEO Liu Qiangdong said his company had opened 10,000 convenience stores (primarily by franchising existing outlets) every week through March and planned to open 1000 stores every day by the end of 2018. Earlier that year, the company launched its own convenience store 7Fresh and entered into a partnership with Japanese china FamilyMart.

Not to be left behind, WeChat parent Tencent announced early last year that it had acquired a stake in French Supermarket operator Carrefour’s China operation, and the new partners opened their first smart supermarket in Shanghai in May 2018.

Metro Gets Back in Shape

While China’s online heavyweights have been stocking up on stores in recent years, Metro AG has been slimming down in what the company says is an attempt to focus on focus on its core wholesale business. In 2015, the group sold off its department store unit Kaufhof, and in 2017 it separated from its consumer electronics business Ceconomy AG. Just this Tuesday, the retailer announced that it is in talks to sell its now unprofitable hypermarket brand Real.

Shares in Metro AG moved up 2.5 percent after news of the potential deal with Alibaba broke, but have since slid back to their February 13th level.