Alibaba (BABA) Makes Big Push Into 'New Retail'

Alibaba ()

Alibaba ()

In a letter to shareholders in October 2016, Alibaba’s executive chairman Jack Ma wrote, “In the coming years, we anticipate the birth of a re-imagined retail industry driven by the integration of online, offline, logistics and data across a single value chain. With e-commerce, itself rapidly becoming a ‘traditional business,’ pure e-commerce players will soon face tremendous challenges.”

Alibaba (BABA) is gearing up for any such challenges ahead by working on a business model that would be a fusion of online and offline channels. Here’s how.

By brining advanced technology (such as big data and smart logistics) to a brick-and-mortar store, Alibaba is looking to offer more efficient, flexible and fulfilling shopping experience to its customers. This merger of online and offline shopping is dubbed as ‘New Retail’ by Alibaba.

Alibaba recently displayed the idea of ‘New Retail’ at a Hema supermarket in Shanghai. Shopping at a Hema fresh store begins with a download of the app, which uses Alibaba’s Alipay as a payment gateway. Every product in the store features a bar code that can be scanned to get all the information about the item chosen (origin, backstory, and even offered suggestions). To make the customer experience more delightful, Hema supermarket even has a restaurant area where customers can get the chosen food cooked up.

Hema stores work on a membership-based model. In its first two years of operations, the chain has reported a conversion rate for making a purchase of 35% (once the customer opens the app) with 50% of total orders coming via online media. Alibaba reportedly pumped in $150 million into the venture in 2016 and has opened 13 Hema stores across Shanghai, Beijing and Ningbo since 2015.

China’s Retail

China is the world’s largest retail market with total sales of approximately $4.886 trillion in 2016. While only 15-18% of its retail market is driven online, it is still the world’s largest retail e-commerce market commanding 47% of digital retail sales globally as per estimates by eMarketer. Goldman Sachs has projected China’s online retailing market reach the $1.7 trillion mark by 2020, growing at 23% CAGR during 2016-2010.

The forecast to fast expanding online retail market in China is based on factors such as increase in online offerings, rising household incomes, growing mobile penetration, increased internet access, changing consumer preferences and increased mix of online-offline platforms. It is estimated that more than 200 million Chinese consumers will be added to the exiting 460 million by 2020.

Moving Swiftly

With a 56.6% share of retail e-commerce sales in 2016, Alibaba is a dominant player in China. Moving ahead with its vision “to merge online and offline shopping into an omnichannel consumer experience centered around mobile-internet technologies” Alibaba made a bid to privatize Intime Retail—a leading China department store and mall operator for $2.6 billion in January. Alibaba owned 28% of Intime at the time of proposing the deal following its investment back in 2014.

In February, Alibaba announced a strategic partnership with Bailian Group to explore new forms of retail opportunities across each other’s ecosystem. Bailian is one of China’s largest retail conglomerates with more than 4,700 outlets across over 200 Chinese cities.

While the pace at which Alibaba is making inroads into offline retail is unprecedented, Amazon’s (AMZN) launch of Amazon Go and its intent to acquire Whole Foods Market, Inc. (WFM) for $13.7 billion reflects an similar road-map.

Final Word

The increasing ‘omnichannel initiatives’ will play a decisive role in achieving the above projections as well in improving logistics management while cutting down delivery time and adding new categories (e.g., perishable items) to the list. Alibaba’s ‘New Retail’ approach will enable it to capitalize on China’s retail market segment that operates offline (85%). This would boost its ecosystem—affiliated services (Alipay), reach, customer base, and revenue in the times ahead.

The company is set to announce its Q1 2018 earnings on August 10, 2017.

The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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