Alibaba is buying a stake in France’s Sun Art Retail Group, which operates “hypermarkets” throughout China, as it escalates its battle in physical stores operated by Walmart and its partnership with JD.com.

(Bloomberg)—Alibaba Group Holding Ltd.’s $2.9 billion deal to buy a slice of China’s largest hypermart chain pits it against Wal-Mart Stores Inc. in the world’s largest retail arena.

China’s biggest e-commerce company agreed to acquire 36% of Sun Art Retail Group Ltd., which operates about 400 hypermarkets under the Auchan and RT-Mart banners. As part of the deal, France’s Auchan Retail SA, No. 13 in the Internet Retailer 2017 Europe 500, will raise its stake in the Hong Kong-listed company to a similar level, and form an alliance with the internet giant to tackle the same Chinese food retail sector Walmart’s targeting.

Alibaba’s essentially using Sun Art to quicken an assault on the $4 trillion bricks-and-mortar retail arena, escalating competition with Walmart in the hypermarts that hawk everything from fresh produce to electronics. Walmart, the world’s largest retailer and No. 3 in the Internet Retailer 2017 Top 500, is focused on turning around a sluggish Chinese operation through a partnership with JD.com Inc. that could widen its customer base beyond cities, and expanding a network of Sam’s Club stores targeted at consumers looking for premium and imported goods. JD.com is No. 1 in the Internet Retailer 2017 Asia 500; Walmart is No. 7.

“Alibaba and Sun Art are forming a strong alliance: China’s dominant e-commerce giant and its best hypermarket operator,” said Veronica Wang, an associate partner with OC&C Strategy Consultants. “They can leverage the alliance and bring more benefits than Walmart and JD.”

Despite Alibaba’s dominant position in online retailing in China, it is not ranked because, like eBay Inc., it hosts other sellers and does not sell merchandise on its own behalf.

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Alibaba’s maneuver again shows how it’s outspending Jeff Bezos in overhauling old-school shopping. It’s the latest in a string of multi-billion dollar investments in physical retail that’ve deepened a lead over Amazon.com Inc. (No. 1 in the Top 500), which kicked off its own foray into groceries by buying Whole Foods Market Inc. for $13.7 billion. Unlike that acquisition, Alibaba’s taking advantage of a years-long revenue deceleration and uncertain prospects to get Sun Art on the cheap—at a 24% discount to its most recent valuation.

Alibaba’s bent on transforming retail by infusing stores with technology to better manage inventory and customer data. Walmart and JD.com too are doing the same, marrying online commerce with data and combining their network of warehouses and cold storage for same-day delivery to customers. The U.S. giant increased its stake in its Chinese partner to just over 10% last year, according to a regulatory filing, cementing their alliance.

But Sun Art now gets the technology and resources needed to take the battle to its deep-pocketed American foe. In return for a massive discount, investors in Sun Art—which had bet since February on a capital infusion—hitch a ride on a potential turnaround. Its shares gyrated on Monday as investors debated the merits, sliding 14% before recovering to close 4% lower.

“Sun Art has a pretty good supply chain so cost-wise it might make more sense than Alibaba doing everything from scratch,” said Julia Pan, a Shanghai-based analyst at UOB Kayhian. “The new-retail strategy seems to be the new trend for e-commerce giants.”

It’s early days in Alibaba’s grand experiment, but if it works, it could deepen a lead over Bezos’ Amazon in the fragmented world of physical retail. Jack Ma’s company spent billions buying into grocers, shopping malls and even department stores long before Amazon picked up Whole Foods.

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The over-arching idea is to connect virtual and offline worlds, boosting online orders while amassing valuable customer purchasing data. It’s betting that a move into physical commerce will pump-prime its main online business, rope in millions of new shoppers, and expand its network into a relatively untapped Chinese hinterland.

“Sun Art can help Tmall to penetrate into lower-tier cities,” Pan said.

Sun Art, for its part, needs the capital and technology infusion. Auchan and RT-Mart have the biggest slice of China’s hypermarket business with about a 15% share, followed by Wal-Mart Stores Inc. with 10%, according to Euromonitor. But the company’s sales growth has sputtered as more Chinese shop online.

Like other retailers, Sun Art is exploring ways to combine internet commerce with physical retail in a so-called “online-to-offline” or O2O model. It’s partly owned by an arm of France’s closely-held Auchan Holding SA, which operates more than 3,700 outlets across 17 countries and reported revenue of 51.7 billion euros ($60.8 billion) last year. Sun Art has sought to make inroads into e-commerce after acquiring control of web grocery store Fields HK and Shanghai Diqi Network Technology Co.’s Xiaohehe e-commerce business in 2015.

But decelerating growth and narrowing margins may be why Alibaba’s getting into Sun Art for about HK$6.50 a share versus HK$8.60 before shares were suspended Nov. 13. Once the acquisition is complete, Alibaba, Auchan and a third company will own more than 77% of the company. As they may be considered “acting in concert,” the group may be required to make an offer for the remainder of Sun Art shares, the listed company said in its filing.

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It “needs to get skill-sets on e-commerce and O2O to help them reach more tech-savvy young customers,” said Wai-Chan Chan, a retail partner at consultancy Oliver Wyman in Hong Kong. “The massive customer data is expected to give Sun Art a better understanding about customers and more experience to do business digitally.”

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