Alibaba to invest $1 billion in ele.me, raising stakes in O2O and mobile payment

One of China’s leading food delivery startups ele.me is about to receive US$ 1 billion funding from Alibaba and its financial affiliate, Ant Financial. This is the second largest startup funding in China this year after the US$5.5 billion raised by ride-sharing company Didi Chuxing.

The funding marks a new step in the ongoing rivalry between  Alibaba and Tencent which is backing ele.me’s competitor Meituan Dianping. Last year in April, Alibaba and Ant Financial completed a US$  1.25 billion investment in the company, making Alibaba their biggest shareholder and diluting Tencent’s own share at the same time.

The newest investment is not just another sign of the booming  O2O industry in China. By forming closer ties with food-delivery startups, Alibaba and Tencent hope to further boost their payment services Alipay and WeChat Pay.

“The focus from the two tech giants on ‘on demand’ services or ‘online to offline’, as they call it in the tech world, is meant to help promote their online and mobile payment services,” Pacific Chiba Trust Head of Mergers & Acquisitions Louis Hunter said in a statement.

Other commentators, such as business news veteran Doug Young, argue that Alibaba, which also operates take-out delivery service Koubei, could take control of ele.me and then make a bid for Baidu’s take-out dining service. This scenario would leave only two major players possibly, leading China’s food delivery industry into a cooling period.

However, according to recent statements from founder and CEO of ele.me Zhang Xuhao, the race to the top of the food chain is still on.

“Currently, the market penetration rate of the entire catering industry is 30%, the whole industry accounts for less than 5% of the Chinese food and beverage industry, “ said Zhang in an interview for PEdaily (in Chinese). “Everything has just begun. It is too early for us to talk about integrations and to talk about mergers“.