INTERNET: Tencent, Alibaba Heat Up Take-Out Dining with New Investments

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Bottom line: New O2O take-out dining investments involving companies backed by Tencent and Alibaba reflects intensifying competition in the space, and is likely to result in a costly price war for market share.

Alibaba, Tencent in new take-out dining investments

The take-out dining space continues to heat up, with word of a major new funding for Ele.me, the service backed by social networking giant Tencent (HKEx: 700), and a big new investment for Koubei, the service owned by e-commerce leader Alibaba (NYSE: BABA). Both investments reflect a recent rush into online-to-offline (O2O) services by all 3 of China’s top Internet companies, as each tries to forge a hybridized mix of services that are likely to make up the retailing landscape of the future.

The larger of the 2 deals has Ele.me raising as much as $630 million in new funding, in a deal that brings in existing investors Tencent, along with its main e-commerce partner JD.com (Nasdaq: JD) and several other major private equity firms. The second has Koubei, Alibaba’s recently resurrected take-out dining site, investing a more modest 300 million yuan ($50 million) in a rival that operates the service called SHBJ.com.

The moves by Alibaba and Tencent come as China’s other top Internet company, search leader Baidu (Nasdaq: BIDU), also makes its own move into O2O. One of its big focuses has also been take-out dining, with the company announcing in July it would pour $200 million into its own service called Baidu Waimai, or Baidu Take-Out. (previous post) Baidu cited its aggressive move into O2O as part of the reason for a drag on profits in its latest quarterly results, reflecting its relatively late arrival to the space.

By comparison, Ele.me has emerged as the clear industry leader in O2O take-out dining services, which allow consumers to order food from a wide variety of restaurants online and have it delivered to their homes. The company was founded in 2013, and received 50 million in funding last year from Dianping, one of China’s leading restaurant and group buying sites that is often called the Yelp (NYSE: YLP) of China and is also backed by Tencent. (previous post)

The latest fund raising for Ele.me marks the sixth round in the company’s brief history, reflecting just how fast it’s growing. (English article； Chinese article) Reports on the size of the fund-raising vary, with some quoting a $630 million figure while the others say the amount was about half that size at $300 million. But no matter how you look at it, this is quite a large amount for a company that’s only 2 years old.

Big-Name Backers

Besides Tencent and JD, other investors in this latest round include financial giant Citic, Sequoia Capital and China Media Capital (CMC), the new media fund connected with Shanghai Media Group (SMG). The deal values Ele.me at more than $3 billion — not bad for a 2-year-old company that now employs 10,000 and handles more than 60 million yuan in daily transactions.

Next there’s Koubei, the take-out dining service that languished in its early life before Alibaba rediscovered it and said in June it would invest 3 billion yuan to build up the site. (previous post) Now the latest reports say Koubei is putting some of that money to work with its own 300 million yuan investment in Shenghuo Banjin Information Technology, operator of the SHBJ.com take-out dining platform. (English article)

Despite being founded in 2010, or 3 years before Ele.me, SHBJ is still relatively small, employing 2,000 and generating just 2.1 million yuan in daily transactions. There’s no word on what stake Koubei will receive, but based on Ele.me’s valuation I suspect Koubei will become SHBJ’s controlling shareholder. Following this investment, we can probably look for a merger of Koubei and SHBJ in the not-too-distant future, and aggressive spending as this company plays catch up Ele.me and also contends with Baidu’s rival service.

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