Alibaba-Sun Art deal a ‘major step’ in China’s retail landscape

This week’s Alibaba-Sun Art deal is a major step in the development of a new retail landscape in China, write Wai-chan Chan and Jacques Penhirin of Oliver Wyman.

This is not a “real estate play” with Alibaba buying 446 grocery stores, but shows how serious Alibaba are in developing the “new retail” model combining the strengths of online and offline retail.

The first winners from this alliance are likely to be consumers.  Alibaba will use its investment in Sun Art to improve its price, service levels and the range of products available. In addition, expect to see Alibaba add the ability to deliver a wide range of goods from these stores to consumers’ homes in super quick times. Today delivery time is the new battlefield but performance is still highly dependent on physical networks.

In the context of retail this alliance is more important than Amazon’s acquisition of Whole Foods in the US.  Sun Art is the largest, and one of the most respected grocery players in China, while Alibaba already has a large grocery business, making it an alliance between two leading players in retail.

Unlocking fresh

Despite the huge advances in e-commerce in China, fresh food has been one of the areas that has been most difficult to convert to e-commerce.  Freshness is the key driver for consumers in grocery shopping. According to a survey of 1500 consumers Oliver Wyman conducted in August, consumers purchase fresh products 4.9 times per week on average, and ‘fresh’ is the number one criterion in grocery retailer selection regarding range, product quality, and value for money. However, 81 per cent of respondents do not think e-commerce provides good quality fresh products compared with offline hypermarkets.

As one of the top two hypermarkets receiving the highest rating from consumers on their fresh offering, Sun Art has strong expertise in operating fresh categories, which will greatly unlock Alibaba’s capabilities.

Ally or die

It is becoming clearer that the endgame of two eco-systems being established by Alibaba and JD.com is inevitable in the retail landscape of China, which poses pressure on those ‘unallied’ retailers such as China Resources, Carrefour, WuMart, etc. For retailers, capturing traffic through their own e-commerce platform will become even more challenging. Traditional retailers must understand that they are competing with giants with unlimited abilities to invest and the ambition of integrating online and offline retail. O2O orders already contribute 30 per cent of sales of Alibaba’s Hema Fresh Supermarket – it is indeed transforming the economics of the offline shopping cart, which is challenged by the declining like-for-like growth over the past 12 successive quarters.

Traditional retailers need to choose their battlefield very quickly, but expect compromise on bargaining power and decision-making in the long term.

Bad news for second-tier brands

The two ecosystems are not pure retailers anymore but integrated media and branding platforms. It does not leave Consumer Packaged Goods brands much of a choice but to closely coordinate with Alibaba and JD.com and learn their rules. Niche brands which understand both the ecosystem and consumers will take this opportunity to grow, and top-tier brands will continue to flourish if they learn how to effectively partner with Alibaba or JD, to have both parties learn from each other. By comparison, weak brands will suffer because the traditional retail stores they rely on are losing ground. Furthermore, as O2O develops, the terms and conditions will become more transparent within the two ecosystems. Promotional pressure will likely increase, requiring more diligence on the return on investment.

Despite the prospects for this alliance, Alibaba and Sun Art need to start thinking how to effectively realise its potential. Operationally, there is huge complexity in integrating the two businesses and overcome barriers of management and culture. After all, it is more difficult to manage shoppers than to manage mobile devices.

  • Wai-chan Chan and Jacques Penhirin are consultants with Oliver Wyman.

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