Alibaba Group Holding Ltd. (BABA, Financial), China’s largest e-commerce company, made a huge move to enter the offline grocery market by investing approximately $2.87 billion in Sun Art Retail Group Ltd. (HKSE:06808, Financial), a top grocery and hypermarket chain operator in China.
Alibaba has been dabbling in the online grocery market, launching a new brand called Hema Supermarket this year that aims to merge online and offline grocery. Discussing the company's retail plans, CEOÂ Daniel Zhang said:
"We believe the future of New Retail will be a harmonious integration of online and offline, and Hema is a prime example of this evolution that's taking place."
The company has been busy investing in several supermarket chains globally and, according to data from Reuters, has invested in excess of $9.3 billion in brick-and-mortar businesses since 2015.
Sun Art has a presence in 29 provinces, municipalities and autonomous regions across China and is recognized as one of the top food retailers operating multi-format stores in the country. Aside from 446 hypermarkets operating under the RT-Mart and Auchan brands, the company also operates zero-staff Auchan Minute stores.
In May, Alibaba established an 18% stake in Lianhua supermarket, one of the largest chains in the country, operating 5,150 outlets across 19 provinces in China.
The investments in Lianhua and Sun Art are a clear indication Alibaba is extremely serious about its ambitions in the $500 billion Chinese grocery market and is willing to enter working relationships with these companies in order to move its agenda forward.
Although e-commerce has been growing at a steady pace in China, the grocery market - as is the case worldwide - is still underpenetrated in terms of digital sales. In fact, nearly 85% of China’s food retail market transactions happen offline.
Alibaba’s interests have now spread across online retail, digital wallet, cloud and data analytics, but partnerships with the top offline retailers in the country will help it to diversify and leverage its core skill areas in the brick-and-mortar retail world, where it neither has the presence nor the requisite competencies currently.
While there may not be an immediate material benefit to Alibaba’s top line from these investments, they will help its retail operations over the long term. Alibaba’s stock price has nearly doubled in the past 12 months as quarterly revenues have grown at double-digit rates. The stock is trading at 16 times sales, which suggests most of the future growth is already priced in. Investors should exercise caution when investing in Alibaba at these levels. It is a great company with a promising future, but there is only a slim margin of safety.
Disclosure: I have no positions in the stock mentioned above and have no intentions of initiating a position in the next 72 hours.
