Alibaba's massive investment in mobile ordering reaches far beyond China

Alibaba is investing billions into mobile ordering technology in China — but what is more fundamentally American than spending large amounts of money on food?

Alibaba's decision to take ownership of Ele.me, or "Hungry," follows a string of similar moves by American companies fighting viciously over the market for digital dining and groceries. Paired with moves by Alibaba and its payments affiliate, Ant Financial, to expand in U.S., this puts Alibaba up against the Amazon's multi-pronged grocery strategy as well as high-tech initiatives from the likes of Starbucks and Square.

And this is only the beginning.

The survival of grocery and restaurant businesses doesn't hinge on the next hot menu item, but on harnessing mobile technology to make sure customers have a faster experience and a bigger bill at the end. Mobile ordering apps are the ride-sharing startups of the food industry.

Billions spent on food fintech
Ele.me has seen its value jump to $9.5 billion from $5.5 billion a year ago, and a quick look at Monday's stock market shows that it wasn't the only company affected by Alibaba's investment. GrubHub's stock was down in early trading, but that's likely a daily retreat at worst. The stock has jumped more than 100% in the past year and has a market cap of more than $8.6 billion.

Most apps are spiking. UberEats is outgrowing Uber's flagship ride-
sharing service in many cities, totaling about $3 billion in sales in 2017. DoorDash just raised another $535 million to boost its valuation to more than $1.4 billion; and Postmates' growth has led it to plot an IPO by 2019.

Amazon famously has a multi-pronged strategy for this market. In addition to experimental concepts like the cashierless Amazon Go store and the drive-through AmazonFresh grocery experience, Amazon took ownership of Whole Foods last year for a staggering $13.7 billion. Target and Walmart are also experimenting with digital ordering and delivery concepts.

Square was ahead of the game with its $90 million all-stock purchase of food delivery company Caviar in 2014, but even that wasn't enough. The mobile payments company bought Dallas-based Entrees On-Trays this year, vastly expanding its food ordering options in the Dallas area.

And Starbucks, having reached an apparent limit of its mobile app's penetration, has found mobile ordering to be a fresh — and growing — opportunity in mobile payments.

The great wall opens up
All of this activity comes up against the possibility that these companies will soon be competing more directly with Alibaba and its payments affiliate, Ant Financial, as China loosens restrictions on foreign companies operating within its borders. Last month, the People's Bank of China said it would permit foreign companies to apply for payment licenses and be treated the same as local firms. This coincides with bolder moves by Chinese companies in North America and Europe — including the attempt by Ant Financial to buy U.S.-based Moneygram last year.

President Trump's recently announced tariffs on about $50 billion of Chinese imports would seem to threaten this activity, but Chinese companies will continue to view the U.S. as a lucrative market. And any investments they make within China give Alibaba and its peers the expertise they need to go up against the giants of the U.S. food industry.

'You gotta eat'
These investments are a potentially expensive proposition for merchant service providers, corporate acquirers looking for deals or integration partnerships, but it's an unavoidable part of retail strategy given the close tie between point of sale and ordering in the digital age.

"You gotta eat," said Richard Crone, a payment consultant. "Order ahead is a 'plus one' feature for a payment application. You have a registered known user. You have to have a payment platform and if you can add 'order ahead' to it, it makes it more attractive for a merchant acquirer or a payment platform. That's why GrubHub has been so highly valued."

For restaurants, the bigger opportunity is to pair mobile ordering with delivery. "We've found small restaurants can boost their sales by 30% with a mobile delivery option," Crone said.

In China, this option has allowed the restaurant industry itself to expand, since almost "any kitchen" can become a restaurant, he said.

Payment companies could be potential acquirers as they diversify beyond payments, but are currently focused more on fraud detection and e-commerce facilitation in their M&A strategy, according to Ray Pucci, an associate director at Mercator Advisory Services. "The more probable buyers of delivery services and apps are merchants, plus the likes of Amazon and Walmart," he said.

Mobile delivery also has a future beyond restaurants, Pucci said.

"Merchants across verticals are getting into the act, especially in the grocery category, although other merchants such as Macy's and Best Buy have added delivery to their mobile app strategy," Pucci said. "Same-day delivery has now become table stakes in large metro areas, but the costs are steep for providers and already there is some shakeout occurring. But on-demand, mobile delivery is here to stay."