Alibaba to Open 30 New Stores, Retail Strategy in Focus

Alibaba Group Holding Limited BABA is expanding its presence in the grocery market. The company plans to open 30 Hema supermarket stores in Beijing by the end of the year.

Hema stores allow customers to buy groceries online and have them delivered to them, as well as shop at the store locations. These customers enter by scanning a QR code, select items through a mobile app and pay automatically through Alipay at the checkout.

Currently, the Chinese e-commerce giant operates five Hema stores in Beijing, 14 in Shanghai, two in Ningpo, and one each in Hangzhou, Shenzhen, Suzhou, and the Southwestern city of Guiyang.

Continuous Focus on New Retail Strategy

The company has been making investments in offline stores for quite some time now. Alibaba purchased 35% stake in department store operator InTime in 2014 and then purchased a 20% stake in retail giant Suning in 2015.

This year, it acquired the remaining stake in InTime and privatized the company. The company purchased a stake in grocery chain Sanjiang Shopping Club Co Ltd. Also, it entered into a strategic partnership with Bailian Group to leverage on its big data capacities and to explore new retail opportunities across outlet design, technology research and development, customer relationship management, supply chain management, payment and logistics.

This New Retail strategy is aimed at bridging the gap between online and offline shopping using big data capacity and implementing new ways to evolve across marketing, inventory and distribution networks.

The broader goal is to tap China’s massive retail space worth approximately $5 trillion and comprising both online and offline options. Notably, offline retail currently constitutes 85% of the total retail sales in China despite the enormous growth of e-commerce over the last few years.

Increased competition from the likes of eBay EBAY, Amazon AMZN and JD.com JD, and market saturation have forced Alibaba to move beyond hawking goods online.

China’s Grocery Segment

For the last few years, China has been one of the largest grocery markets in the world. The market is also expected to grow at a higher rate than in the United States to become a $1.6 trillion market by 2021. Moreover, the online grocery market in China is expected to increase from around 3% of the total grocery market in 2016 to 6.6% by 2020.

Therefore, Alibaba has been gearing up to make the most of the ongoing grocery boom in China and in other countries too.

Last year, the company entered into a strategic alliance with Ruentex Group and Auchan Retail S.A. to buy 36.2% stake in China’s leading hypermarket operator, Sun Art Retail Group, from Ruentex for $2.9 billion (HK$22.4 billion) in order to cement its position in the grocery market.

The opening of new Hema stores will further expand its presence in the capital and help it make inroads to physical stores.

Stock Performance

Shares of Alibaba have steadily treaded higher on a year-to-date basis. While the industry has gained 101.3%, the stock has returned 60.2%.

The robust performance of the stock can be attributed to solid growth in its core e-commerce business, diversification into various growing markets, strong mobile strength, international expansion as well as growing cloud-computing services.

Bottom Line

Online retail is expected to witness slow growth, while the overall retail market still has plenty of room for growth. This can be attributed to the fact that a large number of customers still prefer to shop offline and will continue to do so going forward.

That said, the attempt to merge the online and offline features of retail by giants like Alibaba and Amazon holds promise, as it unites the confidence of shopping offline with the convenience of shopping online. It will not only reshape the retail landscape but also help them fend off competition, if they could manage a first mover advantage.

Zacks Rank

Alibaba currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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