Analysis: Alibaba redraws retail fault lines with bricks-and-mortar push

Lianhua Supermarket Holdings Co

07/12/2017 23:00

* Alibaba spends over $10 bln in offline push 
    * Looking to create retail "net" over all consumers - CEO 
    * Mirrors Amazon's offline drive in U.S. market 
    * Analysts say offline strategy vital for growth, brings 
risks 
 
    By Cate Cadell 
    HANGZHOU, China, Dec 8 (Reuters) - In a small village shop 
near the eastern Chinese city of Hangzhou, store owner Lu Qiwei 
uses his smartphone to place orders to refill stocks of instant 
noodles, rice and drinks. 
    Lu, 61, says he didn't own a phone two years ago, but he's 
now one of 600,000 people using a supply chain app made by 
e-commerce giant Alibaba Group Holding Ltd  BABA.N , aimed at 
drawing millions of Chinese mom-and-pop stores into its orbit. 
    The app is one part of a multi-billion dollar drive by 
Alibaba to extend its dominance of online shopping into physical 
stores, and build a data fingerprint for every consumer in 
China, where 85 percent of retail sales are still made offline. 
    "We're working to make the net in the sky and the net on the 
ground," CEO Daniel Zhang said last month after Alibaba took a 
$2.9 billion stake in top grocery chain Sun Art Retail Group Ltd 
 6808.HK . "We will cover all consumers seamlessly." 
    Alibaba's strategy echoes Amazon Inc's  AMZN.O  $13.7 
billion deal this year for organic offline grocer Whole Foods 
Market Inc  urn:newsml:reuters.com:*:nL3N1JD3Z4 - but with a twist.  
    China's fragmented market means Alibaba is spreading itself 
wider and thinner, hooking an array of mall operators and stores 
to its mobile payment, logistics and inventory management tools. 
    Alibaba said it had no immediate comment on how the two 
companies' strategies compare. 
    Over the past two years, Alibaba has acquired major stakes 
in big box retailer Suning Commerce Group Co Ltd  002024.SZ , 
Lianhua Supermarket Holdings Co Ltd  0980.HK  and Intime Retail 
Group Co Ltd  INTIF.PK . 
    It all adds up to a vital - but expensive - gamble as 
Alibaba looks to maintain rapid growth and meet huge investor 
expectations even as the broader online retail market slows. 
Alibaba shares have more than doubled this year. 
    "It definitely needs to be a priority for Alibaba," said 
Jason Ding, partner at Bain & Company's Beijing office, adding 
it would help the firm tap an older demographic that prefers to 
shop offline, and cut reliance on internet sales. 
     
    FOOT SOLDIERS 
    Alibaba's offline push gives it reach and influence over 
China's broader retail market. Its Tmall and Taobao stores have 
upended e-commerce in the market, and ties to many of the top 
bricks-and-mortar chains extend that influence offline. 
    The push would add at least thousands of supermarkets and 
malls, and potentially millions of small local stores. Amazon's 
Whole Foods Market has about 500 outlets in the United States 
and UK. 
    Despite overseeing a mass of offline sale points, analysts 
say Alibaba still has to piece them together - integrating data, 
managing personnel and protecting consumers' privacy. 
    "These are areas Alibaba doesn't necessarily have amazing 
expertise in, they just happen to have really good access to 
data and really good connections with brands," said Ben 
Cavender, Shanghai-based principal at China Market Research. 
    Getting shop owners on board takes resources and time. 
    Behind Alibaba's Ling Shou Tong supply chain app is an army 
of some 2,000 foot soldiers, who work purely on commission to 
convince store owners to use the app, the firm says. 
    The workers, called 'chengshi paidang' - or city partners - 
train at Alibaba and pay a 3,000 yuan ($454.47) deposit and a 
3,000 yuan annual platform fee to act as salespeople in small 
cities, earning a commission on products sold via Alibaba apps. 
    And there are logistical hurdles, said Yu Wenze, 21, who 
worked as a city partner in a rural area of Shandong province. 
    "First, awareness of the technology is too low and the 
replacement cycle for goods is too long. Also, the logistics 
aren't good enough yet. We have to commit to next-day delivery 
if the shop ordered before 4.00 p.m., but in most cases we can't 
do it." 
    Alibaba's efforts are further complicated by questions over 
ownership of individuals' data, as it extends its offline 
network into highly varied offline environments. 
    "They need that personal information in order to create more 
targeted offline stores, and all of that will require additional 
data to be shared across different locations," said Bain's Ding. 
    "There are a lot of new rules that need to be defined if 
they want to strike the right balance." 
     
    MIXED IMPACT 
    Store owners were mixed about the impact on their business. 
    "They give us storefront decorations and come out to give 
in-store training and other help," said one store owner in 
eastern Hangzhou, who converted his shop to an official "Tmall 
Store". He didn't want his name used as he's not authorised by 
Alibaba to speak to the media. 
    The store is part of a drive launched in August to transform 
10,000 convenience stores outside China's major cities into 
Tmall-branded stores within four months. 
    Near the shop's till, goods have digital price tags that 
change to match online prices. Outside, Alibaba's Tmall mascot - 
a black cat - looms over the shop front. 
    On the top floor of an Intime department store in downtown 
Hangzhou, Alibaba's IKEA-like "Tmall Home Selection" uses 
electronic tags that allow shoppers to browse sofa cushions and 
vases before paying online and getting goods delivered. 
    On a recent Friday afternoon, the store was quiet. 
    "People still buy in the store... but the concept is still 
very new," said a saleswoman who declined to be named. "It's 
empty because people are working right now, but they can always 
buy online." 
    Back in his store, Lu is quietly happy with his new system, 
which he says has cut his costs by knocking local re-sellers out 
of his supply chain. Customers can now also pay more easily on 
their smartphones with Alibaba-linked Alipay. 
    "Now we all work for Alibaba," he said. 
 
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Graphic comparing Alibaba and Amazon offline investments    http://tmsnrt.rs/2AA9w6X 
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 (Reporting by Cate Cadell in BEIJING, with additional reporting 
by Sijia Jiang in HONG KONG; Editing by Adam Jourdan and Ian 
Geoghegan) 
 ((Cate.Cadell@thomsonreuters.com; +8618510722863;)) 
 
Keywords: ALIBABA STRATEGY/OFFLINE