Alibaba adds Ele.me to O2O ecosystem

Alibaba adds Ele.me to O2O ecosystem: Alibaba Group’s investment in food delivery business Ele.me will accelerate the e-commerce giant’s push into China’s fast-growing local services market, which is making it possible for millions of consumers to use their smartphones to find and digitally pay for things they need in their everyday lives.

Ele.me today confirmed that Alibaba will put $900 million into Shanghai-based Ele.me while Alibaba affiliate Ant Financial will invest $350 million. Upon completion of the deal, Ele.me will continue to operate as an independent company. Alibaba Executive Vice Chairman Joseph Tsai will be named to Ele.me’s board.

Founded in 2009, Ele.me is a top online food-delivery company in China, controlling about a third of the market as of last November, according to Analysys International.

While food delivery may seem like small potatoes in the West, in China millions of consumers are downloading smartphone apps to find, purchase and pay for a growing range of common goods and services from take-out food and movie tickets to transportation and hospital visits. In 2015, online food delivery companies alone did RMB45.8 billion ($7 billion) in business, up 200 percent from the previous year, according to statistics from Analysys International. Reseachers estimate the market could reach RMB245 billion ($375 billion) in 2018.

This booming and highly competitive local services market—also known as online-to-offline, or O2O—is being targeted by Alibaba as it expands beyond running China’s largest e-commerce marketplaces by bringing local brick-and-mortar businesses into the digital economy.

The online restaurant directory business is an O2O corollary to the food delivery business. The consumer visits the restaurant, often through location-based promotions, as opposed to getting take-out delivery. Last year, Alibaba and Ant Financial said they were investing nearly $1 billion in Koubei.com, which provides users with a mobile dynamic directory to local restaurants, to “transform and upgrade China’s local services sector”—a transition that is already well underway. A McKinsey survey of Chinese consumers released last year found that 71 percent were already using O2O services.

By adding Ele.me to its growing roster of O2O partners and affiliates, Alibaba will be able to more quickly achieve scale in local services by leveraging Ele.me’s customer base of 50 million users in 300 Chinese cities. Alibaba has been following a similar investment strategy to expand its business in other areas by relying on management talent that comes with acquisitions and investments. Examples include the company’s recent stake in Southeast Asia e-marketplace operator Lazada, and its acquisition of established Chinese streaming-video kingpin Youku Tudou.

Alibaba says its broad goal is to build out a mobile-centric e-commerce ecosystem that will make the Internet part of the Chinese consumer’s everyday purchases. The company’s popular mobile apps Alipay, a digital wallet, and Mobile Taobao are two “super apps” that already offer entry points to an e-commerce menu of physical goods, digital entertainment and mobile services.

Under the agreement with Ele.me, Alibaba and Ant Financial will help consolidate the company’s leadership in the online food delivery business by leveraging the large user base for Mobile Taobao and Alipay digital wallet, Alibaba said in a statement. Meanwhile, Ele.me agreed to assume operation of Koubei’s online food delivery service.

“By empowering each other, this will be a win-win deal and could expand the boundaries of e-commerce,” said Alibaba Group CEO Daniel Zhang in a statement released by Ele.me.

Ele.me founder and CEO Mark Zhang said Alibaba Group and Ant Financial offer “strengths including huge traffic, business insight and mature payment and financial services.”

“They understand and value the O2O market, and fully trust Ele.me,” Zhang said in the release.