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Alibaba joins offline retail push by China's e-commerce players

Online shopping has long been considered a threat to traditional brick-and-mortar retail. But as e-commerce moves toward market saturation levels, online retailers in China are taking a step offline into physical stores.

A recent investment by Alibaba Group Holding Ltd. reflects the trend. The e-commerce giant acquired an 18% stake in Shanghai-based Lianhua Supermarket Holdings Co. Ltd., strengthening a strategic partnership it set up several months earlier with the supermarket chain's parent Shanghai Bailian (Group) Co. Ltd., which has more than 4,700 retail outlets across China.

Collaboration between the partners will take place in a number of areas, according to Alibaba. The partners will use big data to analyze consumer needs in order to improve supplier channels and merchandise selection. Customers will also be able to use Alibaba's payment service Alipay in Bailian's stores. Logisticswise, certain orders placed on Alibaba's online shopping platforms can be sourced from Bailian's local store network to ensure quick delivery.

The deal adds to Alibaba's expanding footprint in physical retail. The company recently offered to privatize mainland Chinese department store and shopping mall operator Intime Retail (Group) Co. Ltd., following an initial investment in the retailer in 2014. It has also invested in Chinese electronics retailer Suning Commerce Group Co. Ltd. and grocery chain Sanjiang Shopping Club Co. Ltd.

E-commerce retailers like Alibaba are pursuing growth beyond their slowing online business, according to Yi Peng, a retail analyst for Zhongtai Securities. "With China's online retail sales surging and accounting for more than 10% of total retail spending in recent years, the room for deeper e-commerce penetration has continued to narrow, particularly in urban areas," he said in an interview.

Alibaba has seen growth of new active accounts continue to slow since late 2014, according to the analyst. In March, the number of Alibaba's active users reached 507 million after 23.7% year-over-year growth, down from the 41.9% increase recorded in the same period a year ago.

"E-commerce retailers' rapid online expansion may have plateaued. To seek further growth, they have to establish omnichannels to reach various consumer bases, including consumers who still prefer to shop at physical stores," said Peng, who noted that offline retail still holds much potential, as it still accounts for the lion's share of total retail sales in China.

Alibaba's rival JD.com Inc. has adopted a similar strategy in recent years, having invested in Yonghui Superstores Co. Ltd. in addition to forging a strategic alliance with Wal-Mart Stores Inc. The company recently unveiled a plan to open more than 1 million convenience stores across China in the next five years, half of which will be in rural areas.

Overseas, Amazon.com Inc. has similarly been tapping into physical retail by opening Amazon Books stores around the U.S. and launching the grocery delivery and pickup service AmazonFresh in the U.S. and U.K. It also has the cashierless convenience store prototype Amazon Go operating in Seattle, with reported plans for future expansion.

This new business model blurring the boundaries between online and offline has been championed by Alibaba founder and chairman Jack Ma. In a letter to shareholders in October 2016, he said: "E-commerce itself is rapidly becoming a traditional business today. Over the next 30 years, we will see a new retail model with online, offline, logistics and data integrated across a single chain. Pure e-commerce players will face tremendous challenges."

The shift is welcomed by brick-and-mortar retailers, which have been seeking ways to transform their business, according to Yanru Fan, deputy secretary general of the China Commerce Association for General Merchandise.

"Physical retail has been challenged by e-commerce in pricing and convenience. However, the bigger challenges are about how to widen the merchandise selection and keep up with changing consumer tastes," Fan said in an interview.

Brick-and-mortar retailers are hoping to leverage e-commerce retailers' big data capabilities to find a solution, she added.

Integration will likely continue, according to Fan, who said offline retailers eager to turn profitability around are expected to show the biggest interest in online tie-ups. Alibaba's partner Lianhua Supermarket, for example, has seen revenue on a declining trajectory since 2013, according to its annual reports.

China's top policymakers have also been supportive about combining the offline and online sectors. The State Council in November 2016 released a guideline promoting the transformation of physical retail, in which it encourages the use of data technology and partnerships with e-commerce players.

However, while the new business model looks promising, Fan said it still remains in a trial stage and will take time to prove lucrative.