China’s e-commerce giant is abandoning its unique selling point. Alibaba is trumpeting a push into bricks-and-mortar shopping. It’s not alone but the stakes are particularly high for the $392 billion giant led by Jack Ma Yun as it marks a reversal of the asset-light model which fueled its extraordinary profitability.
Three years ago, when the Hangzhou-based company went public in New York, investors were drawn to the company’s low cost model of matching sellers and buyers online. Ma rejected the direct sales model of Amazon and local rival JD, which relies on holding inventory. Instead, Alibaba charged for advertising, took commissions, and turned to outside partners to take care of warehousing and delivery. That kept the e-commerce group’s balance sheet trim.
Now Alibaba’s growth online may be reaching its limits. Revenue for the Chinese e-commerce business, which accounts for over 70 percent of the total, soared 43 percent to 114 billion yuan ($16.9 billion) in the 12 months to end March. But for Alibaba to meet its revenue targets for the current fiscal year, it will have to outgrow China’s entire online shopping market.
That’s because e-commerce shopping transactions will increase just 19 percent this year, down from 37 percent in 2015, according to iResearch. And while the $700 billion market is sizable, 85 percent of Chinese retail spending still happens in physical shops. So going offline presents a tempting way for Alibaba to maintain its growth trajectory.
Ma’s so-called “New Retail” strategy envisions marrying the two worlds. The basic idea is that Alibaba will now build some of its own test stores from scratch and upgrade existing brick-and-mortar shops in partnership with established retailers to make them more efficient in both online and offline sales.
Alibaba’s $2.6 billion plan announced in January to take private InTime, a leading department store operator, fits the bill. As does Alibaba’s own supermarket chain, an experimental concept called Hema, which allows shoppers to buy groceries online and have them delivered as quickly as within 30 minutes. Customers can also go to the store to select fresh produce, have it cooked and eat there. A similar experience could be applied to shopping for clothes.
The attraction for existing retailers is a chance to boost their notoriously low margins by tapping into Alibaba’s technology and platforms to manage inventory, supply chain, and logistics. Stores can also benefit from using the tech giant’s algorithms to analyze shopping habits and by moving to cashless checkouts, powered by Alibaba’s payments affiliate. The e-commerce group boasts that sales per unit area at Hema are up to five times higher than a traditional supermarket. The same ambition and logic has driven its US rival Amazon, which has opened its own-branded stores and last month spent $13.7 billion to acquire the local Whole Foods Market chain.
Online shopping is still lucrative for Alibaba, but the company is evolving into something entirely different. (Source: Global Times)