Alibaba to take control of Sun Art in China

Charles Chan
Senior Retail Analyst
@RetailAnalysis

Date : 19 October 2020

Alibaba is investing approximately US$3.6bn to double its stake in Sun Art to 72%, taking control of the largest retailer in China. Alibaba is purchasing the stake from Auchan, which on completion of the sale will see it exit the Chinese market.

Alibaba strengthening bricks-and-mortar presence

Auchan has accepted Alibaba’s offer to acquire its remaining c.36% stake in Sun Art. Alibaba acquired a 36% stake in SunArt to form a joint venture with Auchan in 2017. Together, they trade from over 480 hypermarkets convenience stores and a handful of supermarkets (including the recently launched RT-Mart Super) across China.

Acquisition supports wider Alibaba ecosystem…

Since Alibaba’s investment, Sun Art stores have undergone a major digital transformation. Alibaba’s commerce platforms, primarily Taoxianda, which enables on-demand delivery for its partner grocery retailers with physical stores, generates and enables approximately 10% of Sun Art’s total revenue.

Two of the hardest sectors or categories for Alibaba to digitise have been food and luxury. With fresh food, for example, the cold chain storage required for perishable goods has needed greater thought and investment.

Alibaba has also used physical stores to double-up as fulfilment centres to enable fast online delivery. Sun Art has c.150,000 employees, and its massive distribution and storage network will supplement Alibaba’s existing ecosystem. Alibaba’s half-day delivery service, which was launched in September 2019, has already helped Sun Art gain new online consumers living in a 20km radius of its stores.

…And adds to its existing bricks and mortar operations

Alibaba trades 227 Freshippo stores, its New Retail supermarket concept. Online activity or sales accounts for 65% of Freshippo’s total revenue. The business has enjoyed growth in the number of older shoppers ordering online following the COVID-19 pandemic.

Alibaba has also invested in many other bricks-and-mortar businesses in the past, e.g. wholesaler Sanjiang Shopping Club Co., New Huadu Supercenter Co., and Lianhua Supermarket Holdings Co.

Competitive landscape in China

Despite significant growth in online grocery, which has been accelerated by the COVID-19 outbreak, bricks-and-mortar retail remains important. Offline retail is still estimated to represent 80% of total retail in China.

Alibaba faces fierce competition, with Yonghui and Walmart trading strongly, plus JD.com investing in omnichannel retailing. After Alibaba’s acquisition of the majority stake in Sun Art, the financial statement will be consolidated into it, which will provide a major boost in revenue for the business. 

Auchan: sale accelerates 2022 business plan

The sale of its stake in Sun Art to Alibaba will generate considerable funds for Auchan. The approximately €3.0 bn the sale will produce will help it pay down debt and deleverage its business, while also providing funds for bolt-on acquisitions in existing markets and the opportunity to enter new ones.

Auchan said that despite the sale, it and Alibaba 'remain committed to technological collaborations and will continue to research opportunities for joint actions in countries where Auchan Retail has a presence, both now and in the future.'

Auchan has exited three countries in recent years, following the sale of its operations in Italy, exit from Vietnam and now this, while also closing unprofitable stores. Its H1 2020 results showed how its recent initiatives have put it back on the path to profitability. While challenges remain in France and Russia, especially, its exit from China will provide new operational clarity, funds to expand and the chance to invest in its businesses globally to compete.