Chinese e-commerce companies JD.com (NASDAQ:JD) and Pinduoduo (NASDAQ:PDD) both recently invested in Gome Retail, one of the largest privately owned electronics retailers in mainland China and Hong Kong.
Pinduoduo bought $200 million in Gome's convertible debt in April. The bonds yield 5% annually over the next three years, and can be converted to a 5.6% stake in Gome on a fully diluted basis. JD.com bought $100 million of Gome's convertible bonds the following month.
Let's see how these investments could benefit JD and Pinduoduo, which are both competing against Alibaba (NYSE:BABA) in China's crowded e-commerce market.
How can Gome help JD?
Gome Retail already operates an official flagship store on JD.com. JD claims the new investment, which includes a strategic partnership, "will achieve more synergies and better supply chain integration, as well as resource sharing in logistics and installation services, and other business-related aspects such as financial services."
JD claims the partnership will also expand its reach in the home appliances market. Over the past year, JD has also invested in appliance makers like Five Star, D Phone, and Lecoo, and tested out brick-and-mortar showrooms, including its JD E-Space, JD Computer and Digital Products Stores, and JD Home Appliance Experience Stores.
That expansion could widen JD's moat against Alibaba, which also sells a wide range of electronics and appliances on Tmall. Last quarter, JD's sales of electronics and home appliances grew nearly 10% annually through the COVID-19 lockdowns across China against a nationwide decline of 21%.
JD's annual active shoppers grew 25% year-over-year to 387.4 million last quarter, and Daiwa analysts expect that figure to top 400 million by 2021. That growth could be buoyed by JD's expansion of its electronics and appliances business, its growth in lower-tier cities (which accounted for over 70% of its new users last quarter), and the ongoing improvements to its first-party logistics network and brick-and-mortar stores.
How can Gome help Pinduoduo?
Unlike JD, Pinduoduo isn't profitable. The discount marketplace carved out a niche in lower-income markets by encouraging shoppers to team up on bulk purchases, but it's still subsidizing its discounts to lure shoppers from Alibaba and JD.
PInduoduo is burning a lot of cash, so it raised $1.1 billion in a private share placement in March. Its purchase of Gome's convertible bonds marks its first strategic investment after that offering.
Pinduoduo previously struggled with merchants selling low-quality and counterfeit goods. It also faced stiff competition in top-tier cities from JD and Alibaba. To address those challenges, Pinduoduo courted brand-name merchants with aggressive subsidies -- but Alibaba struck back by locking merchants into exclusive deals.
Pinduoduo's annual active buyers grew 43% year-over-year to 628.1 million last quarter, but it still generates less revenue than JD or Alibaba because its shoppers make much smaller purchases. Therefore, offering Gome's electronics and appliances could significantly boost its revenue per shopper, while adding more brand-name merchants to its marketplace.
Pinduoduo also claims the partnership will deepen its reach into the consumer-to-manufacturer (C2M) market, which enables brands to design their products based on data gathered from its e-commerce platform.
It's all about challenging Alibaba
Alibaba controlled 55.9% of China's e-commerce market last year, according to eMarketer. JD ranked second with a 16.7% share, followed by Pinduoduo's 7.3% share.
To keep pace with Alibaba's sprawling e-commerce ecosystem, which served over 780 million Chinese consumers at the end of March, JD and Pinduoduo are enlisting major retailers like Gome that straddle the online and offline markets.
JD and Pinduoduo's investments in Gome should benefit all three companies, and investors should expect to see similar deals -- all likely aimed at containing Alibaba -- over the next few years.