Ele.me, Baidu’s takeout delivery business, is being sold by the Chinese online search giant to a firm that is backed by the biggest online retailer in China, Alibaba. The deal will involve both cash and stock. According to sources the sale is motivated by the fact that Baidu has been losing money from the costly business which has shown no signs of paying off.
Currently Ele.me’s valuation is estimated to range between $5.5 billion and $6 billion following the latest round of investment which had been led by Ant Financial, Alibaba’s financial affiliate and Alibaba itself. Last year’s valuation of Waimai, Baidu’s takeout business was $2.5 billion. After the deal is finalized shareholders of Waimai will have a minority interest in the merged entity.
Baidu is also selling the takeout delivery business as part of its business strategy where it is giving priority to artificial intelligence as the driver of growth. In the recent past business units have been consolidated by the Chinese online search giant as it focuses on two artificial intelligence products – Apollo, an open-source platform for driverless cars and DuerOS, a voice-interaction system.
Selling the takeout delivery business is also an indication by Baidu that it has accepted defeat in the online-to-offline market in China which is fiercely competitive. Two years ago Baidu had revealed that it would be allocating about $3.2 billion to on-demand services including group buying and takeout delivery. During that period the chief executive officer of the search giant, Robin Li, was convinced that search was a tool that could connect consumers with services.
Burning through cash
These services however turned out to be more expensive and competitive than Baidu had anticipated. This was in light of the fact that other Chinese tech titans such as Tencent Holdings and Alibaba Holdings were also players in the online-to-offline market. In order to increase market share, Baidu as well as its rivals in the food-delivery space have had to pay subsidies and offer many promotions and this resulted in them burning through cash.
Tencent and Alibaba are expected to continue fighting it out since they are depending on the delivery services to assist them in gaining new users for their online payment systems. Recently the president of Tencent, Martin Lau, revealed in an earnings call that Tencent-backed on-demand delivery site Meituan-Dianping, had assisted in attracting more usage of its payment system.
“We are able to have direct coverage … of most of the restaurants in China,” said Lau regarding the partnership between Tencent and Meituan-Dianping.