TENCENT Holdings Ltd. will buy a stake in Shanghai-listed supermarket chain Yonghui Superstores Co. for about 4.22 billion yuan (US$638 million), setting up a clash with arch-rival Alibaba Group Holding Ltd. in physical retail.

Tencent is acquiring about 5 percent of Yonghui from existing shareholders at 8.81 yuan apiece, Yonghui said in an exchange filing Friday, a 9.9 percent discount to its price before trading was halted Dec. 8.

The investment — a rare foray into traditional retail for a company known for games and messaging service WeChat — may be looking to drive adoption of its digital payments service in stores.

The deal follows Alibaba’s US$2.9 billion November purchase of a stake in grocery retailer Sun Art Retail Group Ltd., which operates about 400 hypermarkets under the Auchan and RT-Mart banners. The e-commerce giant is betting it can use technology to overhaul a US$4 trillion domestic brick-and-mortar retail industry and drive its next phase of growth.

Alibaba has already spent billions buying into grocers, shopping malls and even department stores across the country.

Yonghui, which operates supermarket franchises and has more than 580 stores in China, plans to resume trading today, according to the filing. The firm is China’s fourth-biggest hypermarket operator by market share. Sun Art is the market leader, followed by China Resources and Wal-Mart Stores Inc.

Online firms are expanding in physical retail in their bid to prop up sales and transform old-school shopping. Alibaba is deploying technology to better manage inventory and customer data to gain market share and win more rural consumers.

Wal-Mart, meanwhile, has been focusing on turning around a sluggish Chinese operation through a partnership with JD.com, and by expanding its network of Sam’s Club stores targeted at consumers looking for premium and imported goods.

For Tencent, the investment in Yonghui may help propagate the use of its WeChat Pay service, which has steadily gained market share from Alipay, a rival offering from Alibaba unit Ant Financial.

Wider adoption of payments is key to building data on users and helps Tencent and Alibaba better target advertising. The rapid growth of Tencent’s digital wallet — along with hit games and advertising across its platforms — helped fuel a 61 percent rise in third-quarter sales. (SD-Agencies)