Alibaba luxury e-commerce push with US$2 billion buy of Netease’s Kaola
Alibaba agreed to purchase NetEase's e-commerce business Kaola for US$2 billion
Alibaba Group has agreed to buy Chinese gaming company NetEase’s Kaola e-commerce business for US$2 billion, adding a platform specialising in supplying curated luxury goods to domestic consumers from abroad.
As the e-commerce market matures at home, Alibaba will also invest US$700 million for a minority stake in Netease’s music streaming arm as it takes on Chinese market leader Tencent Music.
The long-rumoured Kaola transaction and the music acquisition clearly illustrate a strategic move to keep small development players out of the reach of e-commerce competitors like Pinduoduo and the versatility of Alibaba in adopting new strategies.
Kaola, introduced by NetEase in 2015, actively targets Chinese customers by selling merchandise from top brands such as Gucci, Shisheido and Burberry, mainly by delivering items directly to consumers.
Its more popularly curated product line-up ensures a loyal consumer base for shoppers, while Alibaba’s Tmall allows a broader range of overseas brands to launch and manage virtual storefronts on its platform, said Ker Zheng, who tracks China’s online retail sector at Azoya’s consultancy.
Zheng said that Kaola should not share user time or basket space with cheaper, non-imported products.
According to Jane Hali & Associates, Chinese consumers account for more than 45 per cent of the worldwide sales of the luxury market and have primarily contributed to a 4 per cent to 6 per cent rise in this year’s sales of high-end shoes, fashion and cosmetics.
Retail analysts see the partnership as good for U.S. fashion brands like Tiffany & Co, Tapestry Inc. Coach founder and Ralph Lauren Corp, as they will have more platform to reach out to customers in China’s small towns.
“There are many cities in China that lack exposure to luxury brands. The deal will give the rising middle class in China access to brands they didn’t have before. In all, its a win for the American luxury brands,” retail analyst Janet Kloppenburg, president of JJK Research Associates, said.
Many of these companies are already investing in the lucrative Chinese retail market by opening big city stores, signing up local celebrities as brand icons, and partnering with Tmall to sell goods, hoping to cushion a fall in sales from fewer Chinese tourists shopping in the U.S.
Kaola and Yanxuan, another private-label, company-branded goods NetEase-run line, accounted for almost half the June quarter revenue of the gaming company.
NetEase does not break Kaola’s sales.
Alibaba Playing Defence
The Kaola deal will boost Alibaba’s access to wealthy Chinese buyers, accounting for more than one-third of worldwide revenue from the luxury goods sector, as online sales at home slow.
In the first half of 2019, online retail transactions during China rose by 17.8 million compared to 32.4 per cent a year earlier, government data reveal.
The acquisition will also assist the tech giant in the face of increasing competition from rivals like Pinduoduo.
In reply to Pinduoduo’s threat, which provides household goods group-buying packages, Alibaba has already updated Juhuasuan, its group-buying product.
Taobao Xinxuan, a line of private label, house-brand goods, was also launched.
“Pinduoduo has a will to push into international brands and cross-border e-commerce, so in the future, they will certainly need Kaola. For Alibaba, they’d want to stop it,” said Liu Yiming, who is monitoring China’s e-commerce market at the 36kr research division.
The investment in NetEase Cloud Music is also a way for Alibaba and NetEase to partner against a mutual foe–Tencent Holdings–along with private equity firm Yunfeng–funded by the tech giant’s leader Jack Ma.
According to Quest Mobile and Macquarie Research, Tencent Music dominates the Chinese music streaming market with an 83.8 per cent share through three streaming services, but it recently reported the slowest growth in a critical growth metric.
It is being investigated by the antitrust authority of China in a review that could end exclusive licensing deals it has forged with the world’s largest record labels, Bloomberg has reported.
NetEase Music and Xiami’s Alibaba have a market share of 10.3 per cent and 2.1 per cent respectively.