February 27, 2018 / 7:44 AM / 10 months ago

Breakingviews - Alibaba delivery deal could be tasty side dish

Drivers of the food delivery service Ele.me prepare to start their morning shift after an internal security check in Beijing, China, September 21, 2017. Picture taken September 21, 2017. REUTERS/Thomas Peter

HONG KONG (Reuters Breakingviews) - Alibaba’s food-delivery roadmap is starting to look a little less grubby. The Chinese e-commerce titan is working on a plan to buy the roughly three-quarters of Ele.me – which transports meals from restaurants to homes – that it doesn’t already own. Doing such a deal simply to challenge Chinese tech outfit Meituan Dianping would be a costly endeavour, but if it can enhance Alibaba’s payments, grocery and parcel operations it makes more sense.

The business of delivering prepared meals is growing quickly in China. As of last summer, Meituan Dianping was projecting some 300 billion yuan worth, or nearly $50 billion, in 2018. That would be more than twice as much as in 2016, and account for 10 percent of the country’s estimated dining sales.

It’s also something of a global phenomenon with the likes of Uber and Amazon in on the action. GrubHub shares have more than doubled over the past year, including a big leap earlier this month when Yum Brands agreed to buy a small stake and established a partnership with the $8.6 billion company to distribute its KFC and Taco Bell fare across the United States. 

There are only morsels available about Ele.me, but media reports indicate Alibaba could value it at some $9.5 billion. That would be at least 50 percent higher than a fundraising imputed last May. Ele.me could use the deep pockets after swallowing up Waimai, another competitor backed by Chinese search engine operator Baidu. Meituan Dianping, which counts Tencent as an investor, also recently secured another $4 billion of capital.

The cutthroat battle is proving costly. Meituan Dianping’s food-delivery business has been adding active users more quickly than Ele.me of late, according to QuestMobile. Despite the links to Tencent’s popular WeChat messaging app, though, it remains unprofitable.

Buying out other investors in Ele.me would have to be part of a bigger strategic plan to deliver financial logic for Alibaba. In theory, the logistics support should help it further marry online with an expanding bricks-and-mortar portfolio that includes supermarket chain Hema. It should also benefit Alibaba’s Alipay system, which hungry Ele.me customers use to purchase their meals. If all those ingredients come together, it would make for a tasty side dish.


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