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Customers should “meet, work and live at Alibaba,” according to the Chinese ecommerce group’s mission statements. The acquisition of a 36 per cent stake in Sun Art, a grocery retailer, for $2.9bn gives the company a chance to move closer to this goal.
Alibaba is paying a quarter less than the last closing price before Sun Art’s shares were suspended. The discount is welcome, since Alibaba’s other real-world initiatives have watered down margins. But the offer price still implies a multiple of 23 times forward earnings for a company that has itself suffered from digital competition. Sales growth at Sun Art fell to 5 per cent last year, a quarter of the rate five years ago. The grocery group’s digital initiatives have not so far stemmed the slowdown. Singapore-listed Dairy Farm trades at a similar multiple though European rivals such as Carrefour and Tesco are rated much lower.
The complex deal transfers Sun Art shares owned by Taiwanese group Ruentex to Alibaba subsidiary Taobao. Privately held French hypermarket group Auchan and Alibaba will end up with similar holdings. Alibaba’s detailed knowledge about spending patterns and consumption habits may yet boost Sun Art’s sales growth and justify the premium. Sun Art’s logistics backbone could also be valuable. The group had a market share of 14.6 per cent of China’s retail sales value in December, according to Euromonitor.
Some find Alibaba’s ambition creepy. But investors have remained sanguine about the grocery drive. The stake in Sun Art will not be consolidated, and so will not impact operating margins. The group’s cloud computing business, growing but not yet profitable, is also expected to ultimately boost earnings.
As long as overall growth continues its frantic pace, uses for cash must be found and Alibaba’s “new retail strategy” can be tolerated. But that will not last for ever. One day, investors will start to ask whether too much physical retailing hampers Alibaba‘s ecommerce appeal.
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