We’re seeing more signs of a major shuffle in the China market for online-to-offline (O2O) dining services, with e-commerce leader Alibaba (BABA.US) at the center of two major new developments in the space.
One would see Alibaba invest US$1.5 billion for about a third of Ele.me, the leader in O2O takeout dining services.
The other has media reporting that Alibaba is looking to sell its 7 percent stake in Meituan-Dianping, China’s recently formed leading group-buying site that operates a rival takeout dining service.
The big driver behind both of these stories is a major consolidation taking place in the O2O marketplace, where money-losing companies are suddenly scrambling to find wealthy backers after being cut off by their more traditional funding sources.
Many of those companies have found a receptive audience from China’s cash-rich big three internet titans — Alibaba, Tencent (00700.HK) and Baidu (BIDU.US).
We’ll begin our O2O consolidation round-up with Ele.me, which was one of the earliest major players to discover the potential of offering internet-based restaurant ordering and delivery services.
According to the latest reports, a deal still under discussion would give Alibaba 30 percent of Ele.me for its US$1.5 billion investment and would value Ele.me at US$4.9 billion.
Word of this possible new investment comes a couple of months after earlier reports said Ele.me was in desperate need of cash and was looking to sell some or all of itself.
Ele.me’s dire situation is the direct result of intense competition in the sector over the past year, with Meituan, Baidu, Alibaba and several other independent rivals ramping up their spending in the area.
Dianping, one Ele.me’s earlier investors and is now merging with Meituan.
But Ele.me has said it’s less interested in such a tie-up with the new Meituan-Dianping.
That provides a nice transition into the second news item, which says that Alibaba is shopping around its roughly 7 percent stake in the new Meituan-Dianping.
Alibaba owns the Meituan-Dianping stake through a previous investment in Meituan before the merger.
Tencent also holds a major stake in the new company through its own previous investment in Dianping and is in talks to lead a new US$1 billion fundraising for the merged company.
Tencent appears to be making a somewhat clumsy attempt to take control of Meituan-Dianping and Alibaba appears to be pushed out.
Reports over the past week have also pointed to growing discord between Meituan and Alibaba.
And now, these latest reports of Alibaba’s plans to sell its Meituan-Dianping stake seem to confirm a divorce is quite likely.
If everything moves ahead quickly, a new landscape of O2O restaurant services backed by each of the big three internet companies could emerge in the next few months.
Tencent would become the controlling stakeholder of Meituan-Dianping, giving it strong assets from Dianping’s popular restaurant ratings and Meituan’s take-out delivery services.
Alibaba would become Ele.me’s controlling stakeholder and combine the company with its own much smaller Koubei take-out dining service.
Last there’s Baidu, which is making its O2O push using its recently acquired Nuomi group-buying site and its own-brand take-out delivery service.
The arrival of such wealthy backers to this story means that competition is likely to remain fierce in the O2O restaurant services business over the next two years.
That’s because all three of the big internet companies are very cash rich and Baidu and Alibaba in particular have both shown a willingness to spend lavishly and incur big losses in order to gain market share.
There’s probably room for two major players over the longer term in such a big market like China, meaning one of the big emerging new companies could quite possibly fail when all is said and done.
I would probably give Dianping-Meituan the best chance of success since both companies were well established and well-run before their merger, and Tencent will offer lots of competitive advantages via its popular QQ and WeChat social networking services (SNS).
Between the other two, I would give Alibaba a slightly better chance of survival since Ele.me has a longer history and has also developed a strong reputation in the takeout dining space.
Bottom line: A new landscape in China’s O2O restaurant services market is taking shape around the big three — Alibaba, Baidu and Tencent. A Tencent-backed Meituan-Dianping the most likely to succeed.
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