What Does O2O Mean For The Future Of E-Commerce?

Alibaba Group Holding Ltd BABA has been promoting its recent $4.63 billion investment in consumer electronics retailer Suning Commerce Group Co Ltd as its latest push toward “O2O.”

O2O is a buzzword within the e-commerce community for “online-to-offline,” but what does O2O actually mean? And is O2O a real opportunity for companies like Alibaba, or simply a justification for poor share price performance?

O2O Defined

The gist of O2O is that, while a large part of traditional brick-and-mortar retail sales can be replaced by e-commerce, there are elements to physical shopping that cannot (or should not) be replicated digitally. However, just because all retailing can’t take place online doesn’t mean that there can’t be online elements to shopping, and the potential for integration between e-commerce and physical retail shopping is the core of the O2O movement.

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Example

Just because a particular business doesn’t have products that can be ordered online and delivered to your doorstep doesn’t mean that the Internet can’t play a role in almost every business.

For example, a local gym will not come and set up a bench press and treadmill in your living room. However, by using O2O services provided by a company such as Groupon Inc GRPN, the local gym can funnel online business into its local “offline” locations.

Some of the fastest growing companies in the world, such as Uber and Airbnb, run O2O-based business models.

Differences Between The U.S. And China

While the integration of online retail and “brick-and-mortar” retail in the United States typically means adding online options to a retailer’s long-established physical store infrastructure, it often means quite the opposite in China. U.S. O2O initiatives include efforts such as the creation of mobile apps to assist in a consumers’ on-site shopping experience.

In China, the adoption of the Internet has occurred faster than the creation of brick-and-mortar retail infrastructure in many rural locations. This development means that O2O expansion efforts by major Chinese companies have often consisted of complementing established e-commerce infrastructure by adding additional physical retail locations.

That’s the type of O2O expansion that Alibaba is seeking in Suning, which claims to have a logistics network that covers 90 percent of China’s counties.

Opportunity Or Excuse?

O2O is being pushed by Chinese companies as the next step in the evolution of e-commerce in China. Internet giants Alibaba, WOWO Ltd - ADR WOWO and JD.com Inc(ADR) JD have all recently taken major steps in the O2O direction. In addition to Alibaba’s recent move, earlier this month, JD invested $700 million in a stake in traditional retailer Yonghui Superstores.

However, the O2O movement is coming at a hefty price for Chinese companies during a time of market and economic instability in China. Baidu Inc (ADR) BIDU recently committed a staggering $3.2 billion in cash to O2O initiatives, which the company projects will lead to “several years” of weak earnings.

Companies such as Alibaba and Baidu have a lot riding on O2O. While the U.S. market has surged this year, shares of Alibaba and Baidu are down more than 25 percent year-to-date.

With 93 percent of retail sales still taking place in-store, some analysts project that O2O could potentially provide a $1 trillion opportunity for companies that are swift enough to capitalize on the movement. However, Baidu, Alibaba and others still have a long way to go in demonstrating that O2O is worth the investment.