September 5, 2019 

BY Josh Horwitz

SHANGHAI (Reuters) - Alibaba Group (BABA.N) has agreed to buy e-commerce business Kaola from Chinese gaming company NetEase for $2 billion, adding a platform that specializes in supplying curated luxury goods from abroad to domestic consumers.

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

The long-rumored Kaola deal and the music investment highlight at once a defensive move to keep niche growth players out of the hands of e-commerce rivals such as Pinduoduo (PDD.O) and Alibaba’s 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 (PRTP.PA), Shisheido and Burberry (BRBY.L), primarily sourcing goods directly from suppliers to resell to consumers.

Its more curated product line up 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.

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

Chinese consumers make up for more than 45% of the luxury sector’s sales across the globe, according to Jane Hali & Associates, and largely contributed to a 4% to 6% growth in this year’s sales of high-end accessories, apparel and beauty.

Retail experts see the deal as a positive for U.S. luxury companies including Tiffany & Co (TIF.N), Coach owner Tapestry Inc (TPR.N) and Ralph Lauren Corp (RL.N), as they will have another platform to reach out to shoppers in small cities in China.

“There are many cities in China that lack exposure to luxury brands... (the deal) will give the rising middle class in China access to brands they didn’t have before... In all, its a win for the American luxury brands,” said retail analyst Janet Kloppenburg, president at JJK Research Associates.

Many of these companies are already investing in the lucrative Chinese retail market by opening stores in big cities, signing up local celebrities as brand icons and partnering with Tmall to sell goods, in hopes to cushion a fall in sales from fewer Chinese tourists shopping in the United States.

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.

 

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