China's Raging Retail War May Spill Into Hong Kong, As JD.com Reportedly Buys 70% Of Supermarket Chain Kai Bo

The e-commerce giant has reportedly purchased Hong Kong grocery chain Kai Bo, aiming to bring its integrated retailing model to the city's local market

Key Takeaways:

• JD.com has reportedly acquired 70% of Hong Kong's Kai Bo supermarket chain, giving it access to the grocer's retail network and property assets
• The e-commerce giant could use the chain to extend its core Mainland instant retail business overseas, combining its supply chain strengths with Kai Bo's local presence

The fierce real-time retail battle raging on the Chinese mainland could be coming soon to nearby Hong Kong.

That's how things appear, following reports that e-commerce giant JD.Com Inc. (NASDAQ:JD) (9618.HK) has purchased 70% of Hong Kong supermarket chain Kai Bo for HK$4 billion ($512 million). If true, the acquisition could represent a major strategic expansion for JD into Hong Kong's real-time retail market, also known as "instant retail" – a growing movement in China as companies race to deliver goods ordered online as quickly as possible.

Completed over four months ago, the deal gives JD.com access to Kai Bo's retail network and real estate assets, according to the reports. It features a transition period clause stipulating that Kai Bo founder Lam Hiu-ngai and the chain's current management team will retain operational control for the next three years. During this period, JD will not seek full operational control to ensure a smooth transition.

Kai Bo's parent companies, Moretide Investments and Hai Feng Food, have reportedly notified their merchant partners about an ongoing "business transfer." They plan to restructure operations, transferring the supermarket and wholesale businesses to a newly established Hong Kong entity, Kai Bo Supermarket (Hong Kong) Co. Ltd., effective from Aug. 1, according to the reports.

JD has not confirmed the reports, saying only that the actual situation differs from the media coverage and emphasizing that only official announcements are authoritative. Sources have indicated that the actual transaction value may be significantly lower than the figure contained in the media reports.

From hawker to grocery magnate

Founded in 1991, Kai Bo is locally known as a budget friendly neighborhood supermarket chain. The rise of its founder, Lam Hiu-ngai, is the stuff of local business lore. Lam arrived in Hong Kong from the Mainland city of Chaozhou in the 1980s, and started out working as an unlicensed hawker in the city's Chai Wan district. He later co-founded a frozen meat shop with friends before independently establishing Kai Bo. From a single small shop in the city's working class Shau Kei Wan district, Kai Bo has grown into a chain with over 90 outlets and more than 1,000 employees.

For JD, Kai Bo provides a channel to extend its highly efficient and powerful supply chain on the Chinese mainland to Hong Kong, which could also act as a springboard for future additional overseas expansion. JD has direct procurement channels with tens of thousands of Chinese manufacturers. Its self-built warehousing, logistics, and cold chain systems give the e-commerce giant a highly efficient network allowing it to procure, move around and deliver a wide range of products within the vast Mainland market.

As one of a limited number of local supermarket chains in Hong Kong with a major store network and its own delivery capabilities, Kai Bo could serve as an ideal beachhead for JD to bring its supply chain model to the city. Efficient use of its Mainland networks could help JD to bypass import distributors and other intermediaries and directly introduce daily necessities, popular brands, and private label products from the Mainland into Hong Kong.  

Such a model would not only offer good prices for Hong Kong consumers but could also open a direct channel for JD's Mainland suppliers to reach overseas retail endpoints, while also acting as a launchpad for markets like Southeast Asia.

The higher-margin Hong Kong market has long been a focus for JD's efforts to internationalize its real-time retail and supply chain capabilities. The company's JD Logistics (2618.HK) arm currently operates fulfillment centers in Hong Kong's Kwun Tong, Kwai Tsing, Sha Tin and Yuen Long districts. It also launched a "front warehouse" pilot program in Hong Kong in 2022 to strengthen its capabilities in same-day and next-day delivery services. Its establishment of a cross-border cold chain center in Yuen Long last year also underscores the company's long-term commitment to building up Hong Kong as an offshore warehousing and distribution center.

In China's increasingly heated real-time retail battle, JD is taking a different approach from its peers. Meituan's (3690.HK) focus is a local delivery-based platform that connects convenience stores, supermarkets, and consumers in real-time without extending into the supply chain. Alibaba (BABA.US; 9988.HK) is using a more in-house approach that connects its Ele.me food delivery arm with its Freshippo supermarket chain and Tmall Supermarket, supporting those with its upstream Cainiao Logistics network. But Alibaba has yet to start actively bringing that integrated model to the Hong Kong retail market.

Full chain capabilities

Thus, JD's move with Kai Bo could make it the only Mainland player in Hong Kong with full-chain capabilities, including direct sourcing from factories, cold chain warehousing, online platforms, logistics delivery and a brick-and-mortar store network. Notably, JD has prior experience in Hong Kong through its investment in Qian Dama, a fresh meat and produce chain. With JD as its second-largest shareholder, Qian Dama officially entered Hong Kong in 2018 and now operates around 50 stores locally.

Kai Bo also offers JD.com substantial real estate assets – an important element in a notoriously expensive property market. While Hong Kong shop rents have retreated from recent highs with a local economic slowdown, Kai Bo's real estate will still help JD to reduce its fixed operating costs in the city, while also providing a hedge for the day when Hong Kong's property market starts to recover.

JD's shares fell for two consecutive trading days after the latest reports came out, dropping about 1.3%, reflecting market concerns about the rumored high transaction price. JD currently trades at a depressed price-to-earnings (P/E) ratio of 8.3 times, well below Meituan's 21.5 times, indicating investors aren't so interested in its story right now.

But that could change if it confirms the Kai Bo acquisition and demonstrates that it can successfully integrate its Mainland supply chains into the Hong Kong retail landscape, with potential to extend that capability to Southeast Asia. Such a move could mark the start of a new globalization campaign for its instant retail business, using a model that could mark a turning point for JD's undervalued stock.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.