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Alibaba's stake in Sun Art bets on further convergence of online, offline retail

Alibaba Group Holding Ltd.'s US$2.88 billion investment into Chinese hypermarket operator Sun Art Retail Group Ltd. marks an ongoing trend in the integration of e-commerce and brick-and-mortar businesses, which analysts expect to support growth on both sides of the retail space.

A 36.16% stake in Sun Art will further extend the Chinese online giant's reach into offline retail by providing access to superstores, unmanned stores and more than 440 big-box stores operating under the Auchan and RT-Mart banners across China.

Alibaba's agreement comes just months after Amazon.com Inc.'s US$13.7 billion acquisition of Whole Foods Market Inc., with both deals reflecting efforts by online majors to court shoppers through sales channels for consumer staples.

"For e-commerce platforms, expanding the product selection in supermarkets, fresh food or fast-moving consumer goods is very important because it brings users back to the platforms more frequently. That's the appeal, that you can integrate offline retailers in some of that product selection with your online platform," New Street Research analyst Kirk Boodry told S&P Global Market Intelligence.

However, the two deals differ in terms of the targets' business focus and strategic significance to the buyers.

"Whole Foods seems to focus more on premium foods rather than convenience," Chelsey Tam, a Hong Kong-based analyst for Morningstar, said in an interview. "Over 370 stores in Sun Art's network can provide one-hour delivery within 3 miles, but hypermarkets are not a premium channel. So fundamentally, there's something different."

In addition, the Whole Foods acquisition is a much bigger deal in terms of price and marks a major step by Amazon into physical retail, while the Sun Art investment becomes another part of Alibaba's ongoing commitment to online and offline integration, according to Boodry.

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"With this latest deal investing in Sun Art, Alibaba has now done more acquisitions in that aspect this year than any in the past. Its scale of investment is ramped up," he said, adding that compared with their global counterparts, Chinese online retail majors such as Alibaba were "first movers" in the brick-and-mortar push for new growth points.

Alibaba has been shopping for offline opportunities as early as 2014 and has invested at least US$11.5 billion in Chinese companies, including department store operator Intime Retail (Group) Co. Ltd., electronics retailer Suning Commerce Group Co. Ltd. and supermarket chain Sanjiang Shopping Club Co. Ltd.

Alibaba has also been rolling out its proprietary fresh food-focused grocery chain Hema across China.

The combination of online and offline operations is a key company strategy that was dubbed "new retail" by Alibaba founder Jack Ma. It involves tracking and analysis of customer data gathered from e-commerce and brick-and-mortar channels in order to predict and meet consumer demands while also increasing efficiency in the turnaround of merchandise.

Alibaba's main Chinese competitor, JD.com Inc., has been operating in a similar vein, with an investment in Yonghui Superstores Co. Ltd., a strategic alliance with Wal-Mart Stores Inc. and a plan to expand its hands-on "experience shops."

"Alibaba and JD.com accelerated their investment in the offline retail market, which still generates more than 80% of China's total retail sales," noted Jamie Shen, an analyst with BOCI Equity Research. "Collecting more data from offline outlets could also help them better monetize consumer data in the future."

While Amazon's recent foray into physical retail has made online and offline integration a global trend, it will likely remain far more intensive in China, where a more fragmented offline segment offers ample opportunities, according to Boodry.

"If you look at the top 100 offline retail chains [in China], they generate about 7% of industry sales. But if you look at chains in the U.S., for example, that number is close to 65%," he said.

For offline retailers, especially those suffering from operational challenges or failed e-commerce efforts, it might prove appealing to team up with established online retail giants to seek a turnaround, according to Morningstar's Tam.

Sun Art offers a prime example. It launched its own online marketplace called Feiniu.com in 2014, but the operation has been a money-loser, the company's annual reports show.

"That also speaks to why shareholders came to the realization that if they don't sell it, they need a partner like Alibaba. ... Otherwise, it's hard for Sun Art to undergo a transformation," Tam said.

E-commerce giants can offer the chance to remake physical retailers through competitive advantages in online expertise, IT infrastructure, payment services, supply chain and logistics, BOCI's Shen noted. However, the analyst added that there can be major challenges in seamlessly integrating online with offline.

"Many of the traditional offline retailers in China are relatively outdated in terms of operations. They may not have inventory management systems, club membership management systems or a digitized sales process," Shen said. "For example, Alibaba is progressing slowly with transforming Intime, since it needs to start with revamping the retailer's hardware infrastructure before integrating its data in a closed loop."

But the integration of e-commerce with brick-and-mortar retail is expected to grow regardless. "If there are more people buying on Alibaba or Amazon's platforms, there will be more sellers and then more choices, which attract more buyers. That creates a cycle, making the online marketplaces increasingly stronger," Tam said.