Here’s Why Alibaba Is Investing In A Physical Supermarket

Recently, Alibaba (NYSE:BABA) announced plans to invest $305 million in Sanjang Shopping Club Ltd., a discount supermarket in China. This investment, along with a share transfer, will give Alibaba a 32% stake in the offline retailer. Sanjang, which can be termed as the Chinese “Sam’s Club”, operates 160 stores across the eastern Chinese province of Zhejiang. Alibaba’s long term strategy is to achieve a transformed retail industry, driven by the integration of offline and online shopping.  As such, it envisages several challenges for “pure e-commerce players” over the long term. We believe this strategic investment would give Alibaba access to Sanjang’s extensive offline retail network and work well in its long term objective of integrating offline and online retail. It should also help Alibaba drive its grocery business, which is touted as a key growth driver for e-commerce in the next few years.

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Integration Of Offline And Online – The Future Of Retail

While e-commerce giants such as Alibaba and Amazon worked as disruptors in the traditional retail industry, impacting revenues of brick and mortar stores significantly, they are now realizing that a pure e-commerce model might not alone be feasible for long term growth. Amazon is setting up convenience stores and reports suggest that it might open 2,000 Amazon Fresh grocery stores across the U.S. in the next ten years.  These reports come after Amazon has already opened physical book stores. Alibaba also ventured into offline retailing when it opened its first offline store in January this year in the north China port city of Tianjin, primarily for imported goods. Amazon’s increased focus on groceries appears due to the projected growth in online grocery shopping. Morgan Stanley research suggests that in 2016, 34% of online shoppers are expected to buy groceries over the Internet, up from 21% in 2015. A Mckinsey report suggests that 40% of Chinese consumers bought food online over the 2014-15 time frame. Alibaba’s Tmall has virtual supermarkets where Chinese consumers can place orders and receive delivery within a day or two.

However, as this landscape rapidly evolves, several consumers prefer to handpick certain grocery items and order others online. A physical convenience store, which allows consumers to select these items physically and then order the rest of the items in-store via an app, can work well for consumers. If Amazon’s plan succeeds in executing this strategy, this could become the new norm for grocery shopping.  Moreover, Alibaba appears to be looking to experiment with something similar in China. With a strategic stake in a physical supermarket, Alibaba can study offline consumer behaviours, identify synergies and potentially convert the stores of Sanjang into offline Alibaba stores. An integrated offline and online channel can prove to be a “win-win” situation for consumers who are struggling to find the right trade-off between convenience and hand picking fresh items such as fruits and vegetables.  Morgan Stanley’s research shows that 67% of consumers who have never shopped for groceries online have not done so because they want to select the fresh products themselves.

Groceries can be a key driver of revenues for Alibaba in the long term and its investment in Sanjang can be a driver of these revenues. As it looks to integrate offline and online channels, Alibaba’s strategic investment in an offline supermarket should work well to meet its long term objectives.

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