Alibaba’s Strategy, 6 Things to Consider
Alibaba is a Chinese eCommerce giant generating a higher gross merchandise volume (GMV) than any company in the world including Amazon. Alibaba also holds the record for the largest initial public offering (IPO) in United States history, raising $21.8 billion in its 2014 IPO. The Chinese eCommerce market, filled with innovation and highly skilled companies, has been one to watch for many years. Even more eyes are on it now that top companies like Alibaba are facing headwinds.
Last year Alibaba was fined a record $2.8 billion in a sweeping anti-trust probe. Add to that a maturing and highly competitive eCommerce market in China as well as a slowing Chinese economy and Alibaba isn’t growing as fast as it used to. In Alibaba’s most recent quarter it generated revenues of $37.6 billion. But its revenues only grew by 10% over last year, the lowest growth rate since Alibaba became a public company in 2014. Despite all of these challenges Alibaba is still a company people watch to see what’s ahead in eCommerce. If you are curious about Alibaba’s plan for staying on top then consider these six elements of its strategy.
1. Create a seamless link between online and offline retail. While eCommerce represents nearly 50% of retail sales in China today that hasn’t always been the case. In 2014 eCommerce only represented 12.4% of China’s retail sales. Recognizing that the majority of eCommerce sales do not take place online several years ago Alibaba came up with its “New Retail” strategy. Jack Ma, who co-founded Alibaba, has described this strategy as “the integration of online, offline, logistics and data across a single value chain.”
New Retail is an initiative aimed at connecting online and offline retail and digitizing stores to provide a better customer experience. It is also an initiative aimed at tapping into the wealth of sales that take place offline in China. “While online shopping definitely accelerated in 2020, saying physical retail is more or less obsolete is not true,” said Nishtha Mehta, a China-based corporate innovation coach. “In fact, we saw the acceleration of offline retail as well—there’s more of a shift toward a true omnichannel integration.”
2. Create a true omni-channel retail chain. With the New Retail strategy in place Alibaba made a move into physical retail in 2016 by opening a chain of futuristic supermarkets called Hema or Freshippo in English. For those of you who can’t make the trip to China here’s a quick overview of what these stores are like:
Scan and go. Customers shopping at Hema can use the retailer’s app to scan the QR code on each item they wish to purchase then the item is added to their digital shopping cart. Scanning a product’s QR code also provides the customer with data on the product including nutritional information, customer reviews, and recipes.
Personalized shopping recommendations. Hema’s app remembers shopper buying behavior and leverages machine learning to make personalized product recommendations for customers.
Digital payments including facial recognition. When customers are finished shopping they pay using Hema's mobile app which is linked to Alipay. Alipay, founded by Alibaba, is an online payment app that has more than 1 billon active users.
Stores as fulfillment centres. Employees pick online orders in Hema’s stores and once they have been picked they are placed on a conveyor belt that carries the order to the back of the store to get it ready for delivery.
Although Hema launched in 2016 this is a strategy more and more retailers in North America are implementing. Best Buy for example, is using its stores to support fulfillment of online orders. “Our stores played a pivotal role in the fulfillment of these sales as almost two-thirds of our online revenue [in the fourth quarter of 2020] was either picked up in-store or curbside, shipped from a store or delivered by a store employee. The percent of online sales picked up by customers at our stores was 48%, representing a 90% increase in volume,” said Corrie Barry, Best Buy’s CEO on the company’s fourth quarter 2020 earnings call.
Fast shipping. Customers shopping at Hema can have their groceries delivered to their home in 30 minutes for free, if the delivery address is within three kilometres of a Hema store. This applies to customers that shop in store and want their orders delivered to their homes or if they made the purchase online.
“This is not a supermarket. This is not a food mall. This is a brand new model," said Alibaba CEO Daniel Zhang in 2017. "Hema just is an example” of Alibaba’s vision for brick and mortar retail. Alibaba is not the only one that thinks eCommerce and grocery retail go together. Amazon purchased Whole Foods in 2017 then in 2020 Amazon opened its own grocery chain called Amazon Fresh.
If a retailer is your go-to provider of food then it can have a larger share of your wallet since you have to purchase food on a regular basis. Customers enjoy the shopping experience at Hema with millions of people signing up for the Hema shopping app. More than 60% of Hema’s gross merchandise value comes from online orders demonstrating Alibaba has made inroads into a category where purchases historically have been made offline.
With the strong integration between online and offline at Hema, many people have called the chain the world’s first omni-channel store and now there are more than 250 Hema stores in China. Hema is rumoured to be valued at $10 billion.
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3. Invest in other brick and mortar retailers. As part of Alibaba’s push into offline retail, in 2015 it invested $4.6 billion in Suning, one of China’s largest electronics chains, to acquire a 20% stake. Then in 2017 it bought a 36.2% stake in Sun Art, China’s largest hypermart chain for $2.9 billion, before buying a controlling interest in Sun Art in 2020.
Since investing in Sun Art, Alibaba has made Sun Art’s merchandise available on its eCommerce platforms including Tmall, Taoxianda, and Ele.me and Alibaba has facilitated shorter delivery times, to as little as one hour, for Sun Art customers. “They [Alibaba] now appear to view [physical stores] as their logistics and delivery system for products and services,” says Jeffrey Towson, a private equity investor and management professor at Peking University in Beijing. “They are using these locations as forward delivery and service points within their network.”
Alibaba didn’t stop there. In 2017 Alibaba took Intime Retail, a leading department store chain in China, private. The deal valued at $2.6 billion came after Alibaba had made several investments in the retailer starting in 2014. “We don’t divide the world into real or virtual economies, only the old and the new. Those who cling on to the old ways of retailing will be disrupted, and brick-and-mortar businesses will be able to create value for consumers if they are integrated with the power of mobile reach, real-time consumer insights, and technology capability to improve operating efficiency,” said Zhang. One of the changes that took place after Alibaba’s investment in Intime is Intime became the first department store to use Alipay in China.
4. Invest in the warehouse store model. Warehouse membership stores like Costco and Sam’s Club are becoming more popular in China as disposable income within the country increases. For example, between 2000 and 2020 disposable income per capita in China grew by approximately 700%. Not wanting to be left out Alibaba opened its own warehouse club store in 2020 called Hema X or Store X in English. These stores charge a membership fee of $40.00 per year and are targeted at wealthier Chinese consumers. The membership fee unlocks a variety of benefits including free delivery, VIP service and discounts.
Hema X follows an omnichannel model where a customer can have their purchases delivered to them in 30 minutes if they live within three kilometres of a store or within half a day if they live within 20 kilometres of a store. On average customers spend $152 per visit at Hema X. “What happened in about 2016 is the market started to realize that this was the one retail format that was insulated from e-commerce’s impact,” said Jordan Berke, a former executive with Walmart China. “It was the one format that continued to grow and that customers were still willing to drive to and loved the experience.” Alibaba has plans to open several more of these stores.
5. Capitalize on the growth of community buying. Another trend that is popular in China is community buying. The community buying model, popularized by online Chinese retailers like Pinduoduo allows a pool of shoppers to buy goods in bulk at lower prices than what they would pay if they bought the same goods individually. It’s a model reminiscent of Groupon and it has taken off in China.
Pinduoduo, for example, grew from zero to over 800 million users in only six years. With this segment of eCommerce growing quickly Alibaba wants a piece of the action. To that end Alibaba launched a community buying platform called Taocaicai to capture market share in lower tier cities in China. “More than 50% of Taocaicai users were first-time buyers of fresh produce on our China retail marketplaces. We believe the ultimate value proposition of the community commerce infrastructure is in our ability to elevate the quality of routine everyday services in local communities,” said Zhang.
6. Continue to expand overseas. With a maturing eCommerce market in China, heightened competition, as well as more regulation Alibaba is turning to international markets for growth. To reflect this shift last year Alibaba separated its eCommerce business into a China and an international division. More than 20% of Alibaba’s customers are located overseas. To serve these customers Alibaba has a few eCommerce businesses including Lazada which serves South East Asia and AliExpress which typically serves consumers from Europe and South Asia.
Alibaba’s goal is to grow Lazada into a $100 million GMV business, a significant increase from the $21 billion the business brought in last year. “This is a good time for Alibaba to expand into Southeast Asia through Lazada,” said Gartner research specialist Sarah Xu. “Competition in China is fierce from other competitors like JD and the government’s zero COVID policy [is] further dampen[ing] consumer spending… As omicron cases decline throughout the rest of the world, it’s a relatively good time to expand.”