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Just months after a rival agreed to pay $700 million for an online grocer with a national footprint, Alibaba Group Holding Ltd. (NYSE: BABA) is reportedly bidding twice that amount for a regional player in China’s fiercely contested instant commerce market.
Alibaba is reportedly offering $1.5 billion for Pupu, the dominant online grocer in South China’s affluent Fujian province, according to a Bloomberg report published last Friday. The move comes four months after Meituan agreed to buy leading online grocer Dingdong for $717 million.
Several factors appear to be driving Alibaba’s reported willingness to pay a premium. Alibaba originally built its business around takeout dining through its Ele.me service, but has expanded into groceries and other products under its Taobao Instant Commerce brand.
Instant commerce has been a key revenue source for Meituan, with delivery services accounting for about a quarter of its revenue in its latest quarterly report. JD.com has also been pushing into instant commerce since last year, initially focusing on takeout dining.
Alongside these major players, SF Intra-city, the city-level delivery arm of SF Holding, is also expanding aggressively in the space.
Pupu’s dominant position in its home market, combined with the broader instant commerce competition, is likely a central reason for the reported bid. Bloomberg noted that Alibaba’s offer is more than double an earlier bid of $600 million made by traditional grocer Sun Art. Other media reports in late May also indicated that Meituan and JD.com were bidding for Pupu.
The instant commerce price wars have weighed on the companies’ financial performance as they spend heavily to build their businesses and offer billions of yuan in subsidies to gain market share. Investors have responded by pushing down shares: Alibaba and Meituan are each down about 23% so far this year, while SF Intra-city is down 29%. JD.com has declined only slightly year-to-date, though the article notes that this has not been strong relative to the broader rally for China tech stocks.
China’s market regulator has repeatedly urged Alibaba, JD.com, and Meituan to ease competition. The companies have said they are heeding the call, but the latest bidding activity and recent financial results suggest that none are backing down.
Bloomberg also pointed out that Meituan’s purchase of Dingdong has yet to receive regulatory approval. The winning bidder for Pupu would also require similar approval.
The article argues that having three or four strong players in instant commerce could represent relatively healthy competition. It also notes that any regulatory veto could harm smaller players such as Dingdong and Pupu, which lack the financial resources of Alibaba, Meituan, and JD.com to withstand a prolonged price war. However, it adds that regulators do not always follow that logic and could veto one or both sales as a form of punishment for failing to lower the intensity of the price competition.
