Alibaba pays NetEase $2bn for luxury e-commerce site Kaola

Alibaba Group Holding Ltd will buy e-commerce business Kaola from Chinese gaming company NetEase Inc for $2bn, adding a platform that specializes in supplying luxury goods from abroad to Chinese consumers.

Alibaba, which is looking for new revenue drivers as the e-commerce market at home matures, will also invest $700m in a minority stake in NetEase’s music streaming arm as it takes on Chinese market leader Tencent Music.

The long-rumoured Kaola deal and the music investment highlight both Alibaba’s efforts to keep niche growth players out of the hands of e-commerce rivals such as Pinduoduo and its flexibility in adopting new strategies.

Kaola, launched by NetEase in 2015, aggressively targets shoppers in China by offering products from top brands such as Gucci, Shisheido and Burberry, primarily sourcing goods directly from suppliers to resell to consumers.

Its more curated product lineup, based on popularity, ensures it a loyal consumer base of shoppers, whereas Alibaba’s Tmall allows a larger range of overseas brands to launch and manage virtual storefronts on its platform, said Ker Zheng, who tracks China’s online retail sector at consultancy Azoya.

“Kaola does not have to share user time or basket space with cheaper, non-imported products,” said Zheng.

Kaola and Yanxuan, another NetEase-run line of private-label, company-branded goods, accounted for nearly half the gaming company’s revenue in the June quarter.

NetEase does not break down sales from Kaola.

Playing Defence

The Kaola deal will boost Alibaba‘s access to wealthy Chinese buyers, who account for more than a third of the luxury goods sector’s worldwide revenues, as online sales slow at home.

Online retail sales in China grew 17.8 percent in the first half of 2019, versus 32.4 percent a year earlier, government data shows.

The acquisition will also help the tech giant face rising competition from rivals such as Pinduoduo, which offers group-buying deals on household goods.

In response to competition from Pinduoduo, Alibaba has already revamped Juhuasuan, its group-buying service.

It also launched Taobao Xinxuan, a line of private-label, house-brand goods.

“Pinduoduo has a will to move towards international brands or cross-border e-commerce, so in the future, they would definitely want Kaola. For Alibaba, they’d want to prevent this,” said Liu Yiming, who tracks China’s e-commerce sector at the research division of 36kr, China’s largest platform to help tech entrepreneurs start up and grow their businesses.

The investment in NetEase’s Cloud Music, along with private-equity firm Yunfeng – which is backed by the tech giant’s founder Jack Ma, is also a way for Alibaba and NetEase to ally against a common rival – Tencent Holdings.

Tencent Music dominates the Chinese music streaming market with an 83.8 percent share through three streaming services, according to Quest Mobile and Macquarie Research, but it recently reported the slowest increase in a key growth metric.

It is under investigation by China’s antitrust authority in a review that could end exclusive licensing deals it forged with the world’s biggest record labels, Bloomberg has reported.

NetEase Music and Alibaba‘s Xiami have 10.3 percent and 2.1 percent market share, respectively.