INTERNET: Baidu’s O2O Blitz Finds Friend in Noodle Chain
Bottom line: Baidu’s tie-up with a major Japanese noodle chain looks like a smart move to build up its fledgling takeout dining business, though it will need to do more to win back investors concerned about its aggressive spending on O2O investments.
A week after its stock was hammered by concerns about big spending on its online-to-offline (O2O) services, leading search engine Baidu (Nasdaq: BIDU) has found a major new ally for that part of its business in Japanese noodle chain Ajisen Ramen (HKEx: 538). This particular deal will see the Hong Kong-listed Ajisen and another investor pump $70 million into Baidu’s takeout dining service, providing a major supporter not only due to the investment but also the chain’s strong presence in major Chinese cities.
Baidu’s stock is still recovering from a hammering last week that saw the shares fall by nearly 20 percent to a year-low after it reported anemic 3.3 percent profit growth in its latest reporting quarter due to heavy spending on O2O services. (previous post) Such services include things like buying takeout restaurant food online, and purchasing items from real-world stores through group buying sites.
Baidu has been positioning its group buying site Nuomi as the centerpiece of its O2O efforts in the group buying and takeout delivery business, with plans to spend a massive 20 billion yuan ($3.2 billion) over the next few years to expand the business to take on current industry leaders Dianping and Meituan. (previous post) But investors seemed uneasy with the aggressive spending that was eating into Baidu’s profits so much without strong indications that it would succeed.
Against that backdrop, this particular new announcement by Ajisen Ramen looks like a bit of public relations work by Baidu to try and ease investor concerns, by showing its O2O services can attract big names both as investors and suppliers to its services. As a Shanghai resident, I can attest that Ajisen Ramen is one of the biggest and most popular fast food chains in China’s commercial capital, probably only behind KFC (NYSE: YUM) and McDonald’s (NYSE: MCD).
According to its announcement, Ajisen and another investor named Hina and Hanking have agreed to invest $70 million in Baidu Takeout Delivery, with Ajisen providing $60 million of the total. (company announcement; Chinese article) In exchange for their investment, the 2 partners will get an equity stake of less than 10 percent in Baidu Takeout, meaning this particular investment will value Baidu Takeout at up to $700 million.
New Variant on O2O Takeout Service
The deal looks like an interesting and potentially potent variation on the current takeout delivery model, which typically sees restaurants offer their food over multiple platforms to customers who want to eat at home. Presumably Ajisen and Baidu will work closely to offer strong promotions together, and Ajisen could potentially even make the agreement exclusive and decline to work with other takeout delivery services.
KFC, McDonald’s and a few other chains already have their own takeout delivery services in China, but this is the first I’ve heard of a major chain working closely with a third-party service like Baidu Takeout. The Baidu unit made headlines a few weeks ago when Baidu announced it would invest $200 million to build up the business. (previous post) That announcement itself came not long after e-commerce leader Alibaba (NYSE: BABA) announced plans to boost its own neglected takeout dining service, and as Tencent-backed (HKEx: 700) Dianping was also heavily promoting its rival Ele.me service.
I have to give credit to Baidu for doing something that the others haven’t really explored yet, by selling a stake in its takeout dining service to a major restaurant chain. Perhaps we’ll see some other restaurant chains follow Ajisen Ramen’s lead, which would certainly add an interesting new ingredient to the O2O take-out dining wars.
I’m not convinced yet that Baidu will succeed at this latest endeavor, but it is definitely following a recent pattern of spending aggressively to build up its new businesses. I do also expect that this is at least partly a PR exercise to show investors that Baidu doesn’t intend to do all the spending alone to build up its new investments. But in that regard, Baidu will probably have to start showing bigger results and even profits with some of its newer businesses to truly win back investor confidence.
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