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Alibaba buys into retail stores strategy
Move is part of a trend of online retailers taking stakes in the offline world
Alibaba is mixing online with offline shopping © FT Montage / Getty
YESTERDAY by: Louise Lucas in Hong Kong
Like many revolutions, the one in retail appears to have come full circle: Alibaba, having spearheaded online shopping in China, is buying physical stores.
Alibaba’s 2.6bn dollars plan to take leading domestic department store Intime private underlines the dilemma being faced by the hordes of disrupters: how to blur the lines between online and offline shopping, and create a model that keeps the fun and feel of shopping, while letting retailers and brands collate the big data that enable them to sell more goods, more quickly and more profitably.
“Today we cannot just separate online and offline,” Daniel Zhang, Alibaba chief executive, told a panel at Davos last week. Even when people are shopping in malls, he pointed out, they are on their phones — literally on and offline simultaneously.
Alibaba, which already boasts investments in offline players such as retailer Suning and white goods manufacturer Haier, is not the only ecommerce name going back to bricks and mortar. Last month, Amazon launched its checkout-free Amazon Go store. Other crossover innovations are springing up. Panasonic is shopping its “intelligent baskets”, which will price items as they are placed inside.
“To say that bricks and mortar is dead is wrong,” says Tom Birtwhistle, senior manager in PwC’s digital strategy division in Hong Kong. “It just needs to evolve, into smaller-format stores, for example, and embrace in-store digital technology.”
It is a lesson start-ups are also learning. Luke Grana, who set up his eponymous Grana clothing company in 2014, was forced into a U-turn on his original ecommerce-only plan — introducing pop-up “fitting rooms”.
“We realised we needed offline presence to increase brand awareness and push people online,” he says. “And lots of people want to try before they buy to get the fit right.”
Customers can try on clothes in-store but still order online via iPads — “there are no cashier tills” — and have their purchases delivered. These partially offline purchases now account for 10 per cent of sales.
It is a sentiment echoed by Alain Bejjani, chief executive of mall, retail and leisure operator Majid Al Futtaim Holding, who talks about stores as showrooms. “It’s not just products and price,” he told the Davos panel. “It’s about the seamlessness of the journey, and total integration between online and offline.”
Alibaba, which represents more than one-tenth of China’s total retail sales and about 75 per cent of those made online, according to HSBC, takes that literally. Its apps enable shoppers to navigate China’s sprawling malls, some of which span more than 1m sq ft, and find where their cars are parked when they emerge hours later.
Amazon unveiled its checkout-free grocery store last month
But it is also rewriting the rules on the well-rehearsed “click and collect” model and corralling big data to loop back to retailers, allowing them to manage their inventory more efficiently.
“Alibaba and Amazon have the same two goals. Two billion customers and a reinvention of the retail model and experience,” says Michael Zakkour of Tompkins International.
“Much in the same way department stores, chain stores, malls, Big Boxes and ecommerce have reinvented retail in the past, Alibaba is using technology, big data and imagination to connect offline and online so that there is only a unichannel retail experience.”
Mr Zhang talks about collapsing the traditional vertical system that sees manufacturers pass goods to a handful of large distributors, who in turn pass them on to smaller ones, who sell to retailers before the goods finally reach the consumer.
Before, he says, a consumer could order a drink and have it delivered to their home. “Now you can order it and it’s delivered to your next stop.” That means inventory can no longer be managed by distributors, who lack the full picture, but requires the whole chain to be digitised and shops to become mini fulfilment centres.
This is where Alibaba takes integration a step further — or rather, a step back, into what founder Jack Ma has called “new manufacturing”, where data can be used to tell the makers in advance what consumers want to buy.
Manufacturers are also waking up to a flatter system and seeking ways to move closer to shoppers. Unilever, the Anglo-Dutch consumer goods manufacturer, last July paid 1bn dollars for Dollar Shave, which sells razors and grooming products direct to consumers using home delivery.
This month Coty, maker of perfumes and lipsticks, bought a majority stake in Younique, an online cosmetics retailer. And the crossover between internet and manufacturers can also be spotted in personnel shifts: US toymaker Mattel tapped Google executive Margaret Georgiadis as its next chief executive.
Some question whether predictive data are enough to dictate fashion trends. “They’re not going to be on the back streets of South Korea looking at styles or pieces of fabric,” says one player.
Others point to conflicts. Alibaba prides itself on being a platform rather than an asset-heavy ecommerce player such as Amazon, yet the Intime acquisition will see it integrate a bricks-and-mortar business into its asset-light ecosystem.
Alicia Yap, analyst at Citigroup, is “cautious” about the future integration and about how Alibaba “would manage the potential conflicts between Intime vs other merchants and brands on its platform”, she writes in a research note.
Others note that China’s online/offline models differ from the west, where platforms are mainly owned by the retailer or brand. Instead, China ecommerce is dominated by third party platforms, be it Alibaba’s Tmall or JD.com.
“If customers are buying through a third party you are never going to get the same level of data granularity on the customer as if it was yours. That’s what all the big [multinational corporations] are beginning to grapple with,” says Mr Birtwhistle.
“So linking data between on and offline is difficult. Solving that problem is the multi-billion-dollar question. No one has really got an answer to that yet.”
China calling
When it comes to innovation at the nexus of mobile, ecommerce and social media, “China is at least three years ahead of the west”, says Tom Birtwhistle, senior manager in PwC’s digital strategy division in Hong Kong.
This is partly down to size: there are more smartphones in China than there are people in America, and 41 per cent have used their phones to shop, according to a PwC survey last year, against 14 per cent globally.
Alibaba is due to report results on Tuesday, but second-quarter numbers illustrate the scale. Mobile monthly active users on its China retail marketplaces hit 450m in September and it had 439m annual active buyers. It reported revenue from core commerce of Rmb28.5bn (4.3bn dollars) in the quarter to the end of September.
While the different models and businesses make the comparison spurious, Alibaba has proved better than Amazon at turning these into profits, reporting a core commerce margin on earnings before interest, tax and amortisation of 62 per cent.
China’s leading edge is also a function of the broader ecosystem afforded by its tech trinity of Baidu, Alibaba and Tencent, collectively known as BAT. Far from just enabling shoppers to buy goods, they are also social media platforms and have their own online payment systems — so they act as a combined Amazon, Facebook and PayPal.
Underlining China’s pioneering role in the area, many multinationals are setting up research and development centres — innovation hubs spanning ecommerce, social and mobile. From 200 foreign-run centres 15 years ago, there are now more than 1,500, and PwC expects their number to increase 20 per cent by 2018.
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