Baidu sells food delivery business to its rival Ele.me

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The online food ordering-and-delivery market, once very hot, appears to be cooling down a little in China. Today Baidu, the country’s search giant, announced an exit from the business: Baidu has confirmed that it has sold its Xiaodu food delivery subsidiary (which operates under the Waimai brand) to Rajax, which operates Ele.me, China’s leading food delivery business that is valued at around $6 billion and counts Alibaba, Tencent and Sequoia among its investors. The deal is reportedly valued at around $800 million (see more detailed explanation below) and gives Baidu a small stake in the bigger operation.

In a short statement announcing the news, Baidu said that Xiaodu is now a subsidiary of Rajax and that Baidu and Rajax had inked “a business cooperation across a broad base of products and services following completion of the merger.”

A Baidu spokesperson has declined to disclose the value of the deal. We are continuing to dig around, but as a potential range, consider that when rumors of this sale were first reported a few days ago, it was estimated to be $500 million for the business, plus $300 million in an additional traffic agreement, amounting to an $800 million deal. But also consider that last year, Waimai’s valuation was estimated at around $2.5 billion.

Taken together, this could mean that the price was actually higher today, or that Baidu was particularly keen to offload this asset, even at a knock-down price.

The divestment underscores a persistent fact in the bigger market for online food delivery: the logistics involved plus the investment needed to acquire and keep customers in competitive markets makes food delivery a very cost-intensive business that has proven challenging for many to bring into the black.

Even the biggest players like Delivery Hero, which has gobbled up a number of rivals over the years, and raised well over $1 billion in funding in a play for economies of scale, is not profitable in all of its markets, and overall was still loss-making when it went public earlier this year. (It, too, incidentally pulled out of China last year amid huge competition.) More recently Blue Apron has been feeling the pinch.

That’s before you consider the plethora of smaller startups that have sold up or shut down rather than grown on their own.

In that context, Baidu was a parent with deep pockets and a specific mission: the company has been very keen to grow out from its core search business into a number of adjacent areas that both could help the search business continue to grow, and also help Baidu diversify its own revenue base.

It’s a strategy also taken by other search giants: Google has its own shopping services that it has been trying to build out; Yandex in Russia has built out a number of businesses in areas like on-demand transport and more.

Baidu’s retreat signals not just that it may be pulling away from costly e-commerce ventures like this, but also that its focus is getting stronger on other areas.

Specifically, the company has been doubling down on what is likely going to form the core of the next generation of computing, artificial intelligence, and the many applications that this will take, whether it is in powering services like transportation or providing information to Baidu’s user base. It’s also been making some acquisitions in line with this, such as its purchase of Kitt.ai earlier this summer.

(Notably, other food-related ventures that tap into this new wave of computing, like this one with KFC to facilitate ordering using face recognition technology, will not be affected by today’s news, Baidu confirmed to TC.)

Additionally, Baidu is moving deeper into investing in other areas. The company now collaborating with insurance giant China Life (a partner in other investments) on a new $1 billion private equity fund called the “Baidu Fund Partnership“. Capitalized with 5.6 billion yuan from China Life and 1.4 billion from Baidu, the fund will focus on late-stage investments in tech startups with a significant presence in China with a focus on mobile, AI, and finance.

Baidu may have lost its appetite for the food delivery market for now, but that’s not to say that there are not others who are licking their chops for more.

Ele.me continues to grow massively, and others like Uber and Amazon are also doubling down in this area, building out from their logistics operations as a base for growth. As more of our economy shifts to consumers using digital platforms to buy goods and services, there’s a clear opportunity there for those hungry to seize it.

Featured Image: Bloomberg / Contributor/Getty Images