Alibaba Takes Next Step In “New Retail” With $2.9 Billion Investment

by Trefis Team
-20.92%
Downside
172
Market
136
Trefis
BABA
Alibaba Group
Rate   |   votes   |   Share

Alibaba (NYSE:BABA) announced its plans to invest HK$22.4 billion ($2.9 billion) for a 36% stake in Sun Art Retail Group, the largest operator of supermarkets or hypermarkets in China. French retail giant Auchan will also increase its stake in Sun Art to 36%, while existing investor Reuntex Group will reduce its stake to under 5%. In this note we take a look at how this move fits into the company’s broader strategic plan.

We have a $136 price estimate for Alibaba, which is around 20% lower than the current market price. Alibaba’s stock price has doubled this year following successive quarters of impressive results and a solid outlook for future quarters.

See our complete analysis for Alibaba

Alibaba Making Inroads to Physical Stores

While Alibaba is already a clear leader in China’s e-commerce market, its primary business is not food and grocery retail. China has been the largest grocery market in the world for a few years now, edging the U.S. in terms of the total market size. The market is also expected to grow at a higher rate than in the U.S. to become a $1.6 trillion market by 2021. Moreover, the online grocery market in China is also expected to increase from around 3% of the total grocery market in 2016 to 6.6% by 2020.

Alibaba has shown interest in brick-and-mortar retail for years, with the company already investing an estimated $8 billion in physical stores in the last two years. Alibaba acquired department store chain Intime for around $2.6 billion earlier this year. Additionally, Alibaba has introduced the company-owned Hema supermarkets since 2015, as a part of its “new retail” vision. At these supermarkets, customers can shop, dine, order groceries for delivery from their smartphones, scan product information (including price) from their smartphones and make payments using Alipay. With the Cainao delivery and logistics business under its belt, Alibaba is in a strong position to dominate the online-and-offline retail and grocery market segments in China.

Sun Art Hypermarkets

Sun Art is the largest operator of supermarkets and hypermarkets in China, with around 450 stores across 29 provinces under the banners Auchan and RT-Mart. The company is still a long way from some of the global retail giants in terms of the number of stores. For instance, Wal-Mart (NYSE:WMT) has over 11,000 stores (4,500 in the U.S. and around 6,500 internationally), while Kroger, Target (NYSE: TGT) and Best Buy (NYSE:BBY) also operate a significantly higher number of stores, as shown below.

However, it is interesting to note that Sun Art operates stores that are generally much larger than their American counterparts. As shown above, Sun Art’s Auchan and RT-Mart stores in China are on average two times as large as an average Costco (NASDAQ:COST) store and more than three times as large as a Wal-Mart store. Comparatively, Germany retail giants Aldi and Lidl operate much smaller and streamlined outlets at around 18,000-20,000 square feet per store.

Alibaba Has A Clear Advantage

While the supermarket industry is heating up in the U.S. – with Amazon buying Whole Foods and Aldi and Lidl entering or expanding in the market – Alibaba is positioning itself well in the Chinese market. The company already dominates the e-commerce space in China, and will now operate the leading supermarket chain. Moreover, Alibaba will likely remain insulated from foreign competition disrupting its domestic addressable market due to the nature of regulations in China. This is important because Alibaba can effectively gain expertise in brick-and-mortar retail and use its data-driven approach to integrate the online and offline shopping experience for customers. Subsequently, Alibaba expects its “New Retail” vision to be implemented on a global level.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!