- Chinese e-commerce giant boasts deep pockets for investment
- Consumer goods will help outmaneuver rivals in rural expansion
Alibaba Group Holding Ltd. isn’t shy about taking on global giants in everything from cloud computing to video streaming. Now, it’s shifting its take-no-prisoners approach to everything from soap to toothpaste.
The company that trounced Ebay Inc. in China has identified fast-moving consumer goods -- think cereal, TV dinners or detergent -- as pivotal to its drive to expand service in the countryside. Chief Financial Officer Maggie Wu vowed to outspend competitors by the billions when it comes to pushing the essential products that people use every day. That poses a direct challenge to JD.com Inc., which specializes in selling electronics but is now also targeting demand for household items.
“We are pretty much sure that we are going to further invest because we have that luxury,” Wu told analysts on a post-earnings conference call. “While the other company is talking about investing a billion dollars, we are willing to invest multi-times of that number.”
Wu threw down the gauntlet minutes after China’s largest online bazaar reported its fastest pace of top-line growth since it went public in 2014, a performance that sent its shares to a 14-month high in New York. Alibaba singled out the so-called FMCG category, which saw a 67 percent surge in business in the June quarter. But CEO Daniel Zhang was “most pleasantly surprised” by a tripling in purchases from Tmall Supermarket, which carries brands such as Nestle SA’s Perrier and Kellogg’s.
Their comments reflect Alibaba’s broader search for growth as its scale expands and traditional markets become saturated. Chairman Jack Ma is looking beyond young, well-educated city dwellers and heading for the countryside, where half the population live. The company announced in 2014 a plan to invest 10 billion yuan ($1.5 billion) in logistics, hardware, and training to push its e-commerce model into 100,000 villages in the next three to five years. That’s something like a sixth of the country’s rural settlements, Jefferies & Co. estimates.
For overseas, Ma wants more than half of the company’s revenue to come from outside China within a decade. A $1 billion investment in Southeast Asia e-commerce company Lazada Group SA helped open a window to six major markets in the region.
“Investors love hearing stories to show that the company has some kind of plan for mid-term growth. The global and rural area strategy falls into that category,” said Jeff Hao, a Hong Kong-based investment manager at China Merchants Securities Holdings. “In reality, these things take a long time to bear fruit, so Alibaba has to be ready to be in it for the long haul.”
Consumer goods will be crucial in a rural thrust. Alibaba has forged alliances to get popular items to villagers -- not just household goods, but also the costlier appliances that employ those items, such as the washing machines that use detergent packages. Third-party delivery companies help its goods trickle down into China’s villages, many in remote mountainous regions out of reach of traditional retailers.
With its $4.6 billion investment in Suning Commerce Group Ltd. last year, Alibaba also gained access to a vast network of store fronts and warehouses in smaller cities and rural areas. Suning had more than 1,600 outlets in about 290 cities in China selling appliances, books and baby products as of August last year.
Consumer goods however are a high-volume, low-profit endeavor. Alibaba’s investment in Tmall supermarket, along with the inclusion of loss-making Lazada, weighed on the company’s core commerce margins in the second quarter, Jefferies & Co. analysts led by Jessie Guo wrote Friday.
“Rural and global investment and FMCG category could lower margin” in the short run, they warned.