Alibaba Finally Hints at Financials Behind a Much-Hyped New Retail Strategy

Alibaba Group Holding Ltd. (NYSE: BABA) co-founder and executive chairman Jack Ma first introduced the term "New Retail" in a letter to shareholders in late 2016. Just over a year later, the phrase was mentioned 40 times in the company's 2018 third-quarter earnings call.

Ma came up with the word combo to describe his ambitious plans to use data and technology to help save brick-and-mortar stores, by combining the best of offline and online shopping. The physical store locations transformed by Alibaba through New Retail initiatives now allow customers to scan items for more information, pay using facial recognition, and order items sent directly to their homes.

In the past year, Alibaba has mainly focused on making sure investors understood the idea of New Retail and why it was worth pursuing. But on this recent earnings call, Alibaba began hinting at the financials behind its plan to transform physical stores into fun, efficient, high-tech experiences that benefit both retailer and consumer.

Alibaba's New Retail projects are adding to the top line

Alibaba has placed a lot of emphasis on its revamped brick-and-mortar stores -- to the point that the New Retail segment is "starting to make meaningful contributions" to its China e-commerce revenue compared to "immaterial amounts" in previous quarters, said co-founder and executive vice chairman Joseph Tsai on the earnings call.

This past quarter was the company's seventh consecutive quarter with revenue growth over 50%, and Tsai said it's all thanks to investments in New Retail, new technology, and acquiring new users. For the past quarter, revenue grew 56% year over year to $12.8 billion.

Alibaba said New Retail revenue was grouped into the core commerce segment's "other revenue" category, which generated $781 million for the quarter. While this was only 6% of overall revenue, the "other revenue" category increased by an incredible 525% year over year.

The company's New Retail projects include stores for fresh-food grocer Hema and for Intime Department Store. "We expect these New Retail businesses will become a more meaningful part of our growth and value creation in the future," Alibaba CFO Maggie Wei Wu said on the earnings call. While New Retail initiatives are adding to Alibaba's revenue, they are also weighing on its gross margin, as the company has to invest a lot in these stores. While the Hema and Intime stores have lowered Alibaba's overall gross margin, Wu said, the company isn't worried because it believes the stores are essential to its future growth and value creation.

Operating margin for the recent quarter dropped to 31% from 39% in the year-ago period. In addition, adjusted EBITA (earnings before interest, taxes and amortization) margin for the core commerce segment dropped to 53% last quarter from 64% a year ago. Alibaba said these drops are largely due to essential investments in New Retail businesses.

Wu said the company is confident that New Retail projects will pay off. The company hopes the positive transformations of the Hema and Intime stores will act as advertisements to other retailers, who will then seek Alibaba's help with transforming their own stores. Soon, Alibaba could have an ecosystem of retailers that are using it New Retail technology, according to Wu. This capital-light strategy allows Alibaba access to physical stores in good locations and gives retailers access to Alibaba's data and technology.

Alibaba's New Retail initiatives rapidly expanding

Alibaba's comments on New Retail during the last earnings call confirmed that it's going all in. "Over the next several years you'll see an unfolding of how we execute the New Retail strategy as it becomes an integral part of Alibaba ecosystem -- Alibaba economy," Wu said.

Last quarter, Hema added five new stores in China, for a total of 25 stores as of Dec. 31, 2017. In addition, Alibaba formed a strategic alliance with supermarket and hypermarket chain Sun Art Retail Group (NASDAQOTH: SURRY) in November, and will help update those stores by using technology that it perfected in Hema stores. The hypermarket operator has 440 stores nationwide, and is No. 1 in the China market as measured by revenue.

Alibaba and an affiliate also invested an aggregate $2.9 billion in Sun Art, for an effective 36% equity stake. "Additional synergies are being realized that will grow our mutual businesses," Alibaba CEO Daniel Zhang said on the earnings call.

Another indicator of Alibaba's confidence in its New Retail strategy is its decision to buy a 33% stake in its payment affiliate, Ant Financial, which runs the Alipay mobile payment platform. The stake was announced in its latest earnings report. This is important because mobile payments are an important part of New Retail.

Conclusion: New Retail is growing fast

Alibaba claims that the term New Retail has quickly become a part of China's retail vocabulary. The company says its brand and retail partners have used Alibaba's digital technology and omnichannel integration to transform more than one million brick-and-mortar stores.

"Since Jack Ma coined the term 'New Retail' in 2016, the term has been widely adopted in China by traditional retailers and internet companies alike," Tsai said on the earnings call. "New Retail has become the most talked-about concept in business."

The company continues to remind shareholders that these are worthwhile investments because while e-commerce may be the future of retail, it still only accounts for 20% of shopping. In order to reap the benefits from the 80% of shopping still done offline, Alibaba needs to be investing in physical stores in a big way.

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Natalie Walters has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.