Rakuten’s $1bln U.S. buy stretches loyalty logic

2014-10-11

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Rakuten’s latest acquisition stretches loyalty logic. Buying U.S. cash back site Ebates for $1 billion will help Japan’s largest e-commerce group beef up abroad. It also underscores Rakuten’s determination to use loyalty schemes to distinguish itself from rivals like eBay and China’s Alibaba. Yet, as with Rakuten’s other recent chunky deals, it’s unclear how all the parts fit together.

Ebates is essentially an online discounter. The firm makes money by directing its 2.5 million active members to 1,700-plus online retail partners which include Wal-Mart Stores and Macy’s. Retailers pay Ebates a commission on every purchase, which it then shares with its members. This can be worth anything from 1 percent to 28 percent of the value of the purchase.

Rakuten’s online retail business has been operating outside Japan since 2008 and is now present in a dozen other markets. Yet overseas sales remain low. Buying Ebates will lift non-Japanese gross merchandise sales to 16 percent, from 6 percent in 2013. That’s a big step towards its target of generating 20 percent from cross-border sales by 2020.

Ebates is the latest in a string of membership-based businesses that Rakuten has bought. These include voice-messaging app Viber and e-books service Kobo. In total, Rakuten has spent $4.4 billion – equivalent to almost one third of its current market capitalization – on acquisitions since 2009, according to Thomson One. But it has also taken hefty impairment and restructuring charges related to past deals.

Rakuten may be hoping to use these acquisitions to replicate the success of Super Points, the Japanese online loyalty scheme that has helped maintain its market share at home. But the exact mechanics of how the acquisitions will combine are hazy. For example, Ebates’ current retail partners include Amazon and eBay – both Rakuten rivals.

The risk is that investors will lose patience with Rakuten’s woolly deal-making rationale. Ebates, which has been around since 1999, earned just $7.8 million last year. Rakuten itself admits it is difficult to estimate the acquisition’s impact on its earnings. Even if a loyalty business proves successful for Rakuten, low barriers to entry mean rivals could quickly follow.