Here's Alibaba's Big Plan to Beat Wal-Mart in China
Alibaba (NYSE: BABA) has ambitious plans. Earlier this year, founder Jack Ma compared the company to sovereign nations by noting that the e-commerce giant's goal is to become the fifth largest economy in the world by 2036. By then, Ma expects that Alibaba will have created 100 million jobs and support 10 million businesses on its platform.
While investors may not fully share Ma's vision, Alibaba has a powerful investment thesis. First, the company and its enigmatic founder are reminiscent of Amazon.com, arguably the most disruptive company ever. Second, Alibaba's home market is China, a country of over 1.2 billion people that's estimated to eclipse the United States and become the largest economy before 2030. Both demographically and operationally, the company seems destined for success.
Recently, the high-flying e-commerce platform did something unconventional to continue its torrid growth and to fend off current retail megaretailer Wal-Mart (NYSE: WMT): It went into the boring grocery industry, and through the traditional brick-and-mortar channel, no less.
Alibaba goes grocery shopping, literally
Alibaba announced that it has a $2.9 billion stake in Sun Art Retail Group, good for a 36% share of the company. Sun Art has roughly 400 hypermarkets, a retail concept that carries both groceries and traditional department-store goods reminiscent of Wal-Mart's Supercenters.
According to a report from Bain & Company and Kantar Worldpanel, hypermarket stores have recently shown signs of strain. For fast-moving consumer goods (FMCG), hypermarkets account for 20.9% of total sales -- down from 24.1% in 2012 because of an annualized growth rate of 1.1%, which is lower than the overall FMCG growth rate. Meanwhile, e-commerce has grown from 2.1% to 7% of total FMCG sales, because of 40.8% annualized growth from 2012 to 2016.
However, what this gives Alibaba are tremendous synergies and the ability to create an omnichannel experience, much as Wal-Mart has done with its grocery pickup service and as Amazon appears to be building with its purchase of Whole Foods Market.
Wal-Mart already has an online grocery presence
While Alibaba is looking for a way to integrate its online platform with its new grocery business, Wal-Mart is already there through its partnership with Chinese retailer JD.com. During the company's third-quarter earnings call, CEO Doug McMillon noted (emphasis mine):
After the quarter, Wal-Mart further aligned itself with JD.com, with my colleague Leo Sun reporting that the two allowed members to receive the same discounts and benefits in time for the important Singles Day.
China's not a winner-take-all market
Even if Alibaba is able to steal market share away from Wal-Mart, China's demographics are supportive of both retailers. In 2016, China's National Bureau of Statistics reported that retail sales increased 9.6%. However, online sales surged 26.2% year on year. At that time, only 53.1% of China was online. Look for both Wal-Mart and Alibaba to continue to post strong growth in the Middle Kingdom as more people come online and the middle class continues to expand.
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Jamal Carnette, CFA owns Amazon.com. The Motley Fool owns shares of and recommends Amazon.com and JD.com. The Motley Fool has a disclosure policy.