Big Players Jockey For Position In China’s O2O World

The news Tuesday (June 30) that Baidu will invest more than $3.2 billion through the next three years on online-to-offline services — with a focus on Nuomi, the group-buying platform acquired last year — indicates that Baidu is aware that it has to play a game of catch-up in this nascent industry.

Commonly known as O2O, online-to-offline services use online sales information and promotions to get foot traffic swelling in brick-and-mortar stores. Group-buying sites, such as Nuomi, can serve as an attractive vehicle to goose O2O uptake as consumers go online, take advantage of coupons and vouchers and then use those items in-store when they go shopping.

Baidu’s CEO, Robin Li, certainly seems willing to spend whatever it takes to get the O2O activity to critical mass. “Right now Baidu has over 50 billion [yuan] in cash on its books,” the executive said in a release Tuesday. “We’re going to take 20 billion of that and do Nuomi right.”

This statement begs the question: Does “doing Nuomi right” imply that the service has been done wrong up until now? After all, Nuomi says it has ties with 650,000 stores across the country. Nuomi, Baidu projects, should be operational across all Chinese cities by year end. In an effort to shore up, and likely create “sticky” relationships with merchants, Nuomi will also debut a “membership plus” service that Baidu says will foster growth for its merchants. Key services will include helping merchants establish tailored marketing plans and, of course, leverage Baidu’s user base.

TechCrunch reports that there will be integration between Nuomi’s member platform and the merchant base’s POS systems. That interplay will let customers pay for goods using “virtual cards” that in turn reside inside the app itself. Baidu also told TechCrunch that it will use big data to help its chain store merchants expand operations (i.e., new locations) more efficiently.

Money that is not being earmarked for Nuomi will be going toward Baidu Maps and other services and also will help finance mergers and acquisitions with a service focus.

Right now it’s a three-horse race in China’s eCommerce and Internet arena with Baidu running up against bigger companies including Alibaba and Tencent Holdings. The pie may be big enough for all three, at the moment, as O2O growth should get a lift alongside smart device usage. And the spectrum of offline services that are getting, or will eventually get, a kicker from online connectivity seems endless.

The most immediate beneficiary is the food takeout and delivery industry. Last week, Want China Times reported that the food-centric O2O industry had sales of just about 10 billion yuan ($1.6 billion) last year. And orders grew about 340 percent in the first quarter of this year from the year prior. Of that tally, Ele.me had a 40 percent share of roughly 170 million orders placed in the quarter, followed by a 34 percent share held by waimai.meituan.com. Those two are trailed by Alibaba’s Taodiandian and Baidu Waimai.

The Baidu announcement comes close on the heels of the news last week that Alibaba, and its subsidiary Ant Financial, will put $1 billion into joint venture Koubei. That JV will be an extension of Alibaba’s mobile platform and will for the moment focus on restaurants and driving foot traffic (spurred, as dictated by the O2O model, by online activity) to brick-and-mortar locations. Each firm is putting up half the $1 billion, and the ownership is split 50/50. Though the initial push may be food delivery, it’s almost a sure bet that the JV will soon be utilizing the Alipay e-payments platform (through Ant) and dive into everything from cleaning services to manicures.

And that $1 billion JV comes after Alibaba spent almost $695 million to take a minority interest in Intime, which operates brick-and-mortar locations in the country, creating another joint venture with an eye on melding online and offline commerce seamlessly.

Against Alibaba’s “first mover advantage” (a caveat here: In techland, being “first to fund” does not guarantee long-term competitive advantage), it’s clear that Baidu must step up its game. In a couple of areas Baidu may be in danger of becoming an also-ran in the online/offline marketplace, at least in some highly visible markets. Take ride-sharing for example.

Uber may get a lion’s share of the headlines in the financial and tech press, but in China, at least, Baidu’s investment in the marquee ride-sharing company — even with a highly touted 1 million rides per day, according to Uber — is finding stiff competition from Didi Kuaidi, a taxi-hailing app that has Alibaba and Tencent as financial sponsors. And Baidu must contend with decelerating growth, which has bedeviled the company for the past four quarters; though truth be told, the most recent 34 percent top line jump year over year in the first quarter remains pretty impressive.

Baidu seems to see the writing on the wall, and by using the financial strength that will be boosted by its recent bond offering announced last week (estimated at $1.2 billion), the company looks to get up to speed against its larger peers — and that’s a good thing. In eCommerce, the only strategy that guarantees failure is inertia.