In late June, Alibaba Group Holding Ltd (NYSE:BABA) CEO Jack Ma redirected American investors’ perception of what an investment in BABA stock is, and isn’t.
In short, Ma isn’t looking to up-end Amazon.com, Inc. (NASDAQ:AMZN) in the United States.
As it turns out though, with Amazon now getting into the grocery business with its bid for Whole Foods Market, Inc. (NASDAQ:WFM), the similarities between the two e-commerce giants are growing again.
See, Alibaba is getting into the grocery business itself… just in China.
Here’s the thing: Ma’s take on the food-retailing game may well be one Amazon would be wise to copy, although not for the reason you might think. Jack Ma’s underlying technology being used to sell more groceries is impressive in and of itself, and could be used in a variety of other retailing segments.
Not a Business Model, But a Product
Most owners of BABA stock probably don’t even realize it, but Alibaba has been in the grocery business for a while now. With the recent opening of three more Hema grocery stores, Alibaba now boasts 13 food-retailing venues in China.
At first blush the company’s Hema arm looks more or less like the aforementioned Whole Foods or Kroger Co (NYSE:KR). That is, it offers milk and bread and dry foods in boxes or bags like any other grocery store does.
There’s a distinct difference between Alibaba’s grocery stores and other grocers, though. While most other grocers are using the classic business model and also making digital services like online-shopping and curbside pickup available to those who want it, Hema stores were built from the ground up to inspire the use of the Hema app.
That app that does a myriad of things consumers like, without even realizing they wanted done. For example, shoppers can pick their purchases by scanning barcodes, and then have store staff pack and up and deliver those goods to the shopper within a half an hour.
Marketing Gold
The app, almost needless to say, gathers a massive amount of information about the individual using it, which becomes marketing gold.
It matters. Hema reports its sales per unit area are three to five times better than that generated by traditional grocers. UOB Kay Hian analyst Julia Pan observed, “The integration of grocery stores, food-service businesses and restaurants with new technologies and e-commerce has formed the embryo of the (online-to-offline) new retail.”
To that end, it’s worth noting Alibaba isn’t developing the platform as a means of selling more groceries the way Amazon is expected to enhance its digital fact-finding tools when it takes over Whole Foods. Rather, for Alibaba, the end-goal is to develop a proven omnichannel product that it can then market to other brick-and-mortar companies looking to tap into the growing online-shopping market.
Such a service could be incredibly marketable. As popular as online shopping has become in China, it still only represents about 15% of the country’s total retail spending. There’s another 85% up for grabs by those retailers that can use the internet to market themselves in ways that extend beyond their storefront, and negate their limited knowledge about their customers.
Bottom Line for BABA Stock
As is the case for Amazon, Alibaba won’t find the food business to be (no pun intended) a fruitful one in terms of profit. Net margins are paper thin in the grocery world, and that’s not apt to change no matter how well Ma orchestrates it.
Then again, that was never the point. At the very least selling groceries is a way of gathering customer information and bringing them into the Alibaba ecosystem, but more than that it’s a way of developing powerful marketing tools for an untold number of retailers.
It’s more akin to…well, what struggling retailers like Macy’s Inc (NYSE:M) and Sears Holdings Corp (NASDAQ:SHLD) need but don’t have. It’s in contrast to what Amazon brings to the table for its sellers, which isn’t much. Of course, on many fronts Amazon itself is competing with its sellers, so why would it empower them any more than it had to?
Whatever the case, the success Alibaba has already achieved in melding online and offline with its grocery business bodes well for its ambition to apply the same approach outside of the grocery world.
Add it to the list of things BABA stock holders can be excited about.
— James Brumley
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Source: Investor Place