Management Assignment
jhh19970724
casestudy.pdf
Alibaba's Bailian Deal The Next Big Move in Retail? Case Study This case was written by Jyothi Javalgi and reviewed by K. Bhagyalakshmi, Amity Research Centers Headquarter, Bangalore. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. © 2017, Amity Research Centers Headquarter, Bangalore. Website: www.amity.edu/casestudies/ No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.
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Author: Jyothi Javalgi
Alibaba's Bailian Deal – The Next Big Move in Retail?
Abstract: Alibaba, China's biggest e-commerce company and Bailian Group, a large brick and mortar retailer in China, announced a strategic partnership in a move to merge online and offline shopping services. The new partnership aimed to leverage Alibaba’s big data and technology to revolutionalise ‘the $4.8 trillion world of domestic brick-and-mortar retail.’ The deal, which did not involve any financial investment in Bailian, was the most recent in Alibaba's growing efforts to seize a larger share of the retail market as online sales growth had slowed down. Both the companies had intended to co-design physical stores that unified offline and online operations to enhance the overall shopping experience. Bailian Group was expected to benefit from Alibaba’s comprehensive logistics capabilities. While both the companies worked towards the integration of offline stores with an online ecosystem leading to a superior customer experience, it remained to be seen if the partnership would enable to capture the next wave of retail growth in China. Would the tie-up leverage the power of big data to achieve integration and help explore new forms of retail across each other’s ecosystem? Would the strategic deal become a building block for the future of retail, where Alibaba predicted a unified offline and online ecosystem?
Case Study
“Our partnership with Bailian is an important milestone in the evolution of Chinese retail, where the distinction between physical and virtual commerce is becoming obsolete.”
1
– Daniel Zhang, CEO, Alibaba Group “The new retail deal is not just the convergence of online and offline worlds. It means we need to leverage technologies such as the Internet of Things, AI and big data to provide consumers with new and immersive shopping experience across channels and product categories anytime and anywhere.”
2
– Ye Yongming, Chairman, Bailian Group
fter the unbelievable pace of e-commerce growth in China, the growth rate had slowed down in the recent years. In the wake of this development, Alibaba teamed up with Bailian Group, China’s largest retail conglomerate to boost its efforts in overhauling traditional
retail using technology. The e-commerce giant who once disrupted the traditional retail industry in China, had of late realised that e-commerce model alone would not be enough for sustained growth in the long run. Rather than launching its own physical stores on a major scale, the company collaborated with large retailers in the country and provided them the required technology to make their systems more efficient. The model seemed to enable Alibaba to hone its pillars of retail and
1 Jing Meng, “Big data meets China’s oldest retailer as Alibaba courts Bailian”,
http://www.scmp.com/business/companies/article/2072314/alibaba-deepens-bricks-and-mortar-retail-push-bailian- supermarket, February 20
th 2017
2 ibid.
A
“© 2017, Amity Research Centers HQ, Bangalore. All rights reserved.”
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upgrade long-established retailers to become an essential part of the new retail. By means of partnerships with several such established retailers, the company seemed to ‘capture the next wave of growth in retail in the country.’ With a vision for the future of retail, where the divide between online and offline retail seemed to have blurred, it remained to be seen if Alibaba would successfully position itself as a strong contender in the evolving retail landscape.
Alibaba in China – Scripting a Growth Story Alibaba Group (Alibaba) was incorporated in 1999 by Jack Ma (Ma) a former English teacher from Hangzhou in China along with 18 other people.
3 The company was named Alibaba since it was easy to
spell, and people all over associated it with the ‘Open Sesame’ instruction to open doors to hidden fortunes.
4 From the beginning, Alibaba’s founders strongly believed that the Internet would play a
key role in facilitating SMEs to ‘leverage innovation and technology’ to compete successfully in the domestic and in the international market.
5 Alibaba was created out of Ma’s unfulfilled dream of
leveraging the internet in the preceding venture, Chinapages. 6 Ma’s proposal to facilitate
international business activities of the Chinese SMEs through the usage of internet was earlier declined by bureaucrats. During the early years, when Alibaba was looking for investors, its business model was considered non-profitable and unsustainable by many. Nevertheless, Ma succeeded in raising funds from Goldman Sachs and Softbank to the tune of $5 million and $20 million respectively. Though Alibaba was unprofitable even in 2003, Ma and his team launched an online shopping site named Taobao.com, without charging any commission from online traders. Determined to takeover eBay
7 in
China, Taobao remained a free of charge marketplace for millions of online sellers that put Alibaba under major financial constraint. However, to sustain business, Ma and his team started offering value-added services for small fees.
The company won the China market within five years, and eBay
virtually exited from China. 8
After Taobao.com was launched as an online marketplace, both Alipay
9 and Aliwangwang (instant
messenger on Taobao) were established to complete the buying process in Taobao. By 2007, the number of Internet users had increased to 210 million in China and subsequently Alimama was launched as an ad transaction platform.
10 Tmall was launched in 2008 to help brands and retailers to
have a virtual presence on the web to carry out transactions. 11
In 2009, Alibaba Cloud computing was established, demonstrating Alibaba’s keenness to prioritize big data as a component of its strategy. In 2010, ‘Juhuasuan (a platform for C2B), AliExpress (a global consumer marketplace) and Mobile Taobao App’ were created as part of Alibaba’s growing emphasis on mobile payments.
12
3 “History and Milestones”, http://www.alibabagroup.com/en/about/history
4 Fong April, “Alibaba founder Jack Ma: From school teacher to China’s richest man”,
http://business.financialpost.com/executive/leadership/alibaba-founder-jack-ma-from-school-teacher-to-chinas-richest- man, September 19
th 2014
5 “History and Milestones”, op.cit.
6 An online business directory where Ma partnered with a government entity that had majority control on the venture.
7 US based multinational e-commerce corporation.
8 Jalloh Mohammad, “Jack Ma: Success Story”, http://www.investopedia.com/university/jack-ma-biography/jack-ma-
success-story.asp#ixzz4c3GQZmUM 9 Chinese equivalent of America’s PayPal.
10 Pavie Xavier and Luo Yixuan, “The seven reasons for Alibaba’s success”, Alibaba’s development and framework”,
http://www.retailnews.asia/seven-reasons-alibabas-success-alibabas-development-framework/, July 19 th
2016 11
Kwan Ken, “Alibaba - Drive To Sustain Growth In The Progressing World Of Ecommerce”, http://www.ntc.ntu.edu.sg/ntcc/Documents/Full%20Version/2.%20ALIBABA%20- %20DRIVE%20TO%20SUSTAIN%20GROWTH%20IN%20THE%20PROGRESSING%20WORLD%20OF%20E-COMMERCE.pdf 12
“The seven reasons for Alibaba’s success”, op.cit.
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Though Alibaba owned companies of all sorts, it basically operated through three sites namely Taobao.com, Tmall.com and Alibaba.com. Taobao was China's largest shopping site while Tmall specialised in online sales of branded merchandise with focus on China's rapidly-growing middle class. Alibaba.com connected China based traders with companies across the globe. The websites hosted millions of sellers and businesses, and had hundreds of millions of users. In terms of the volume of business handled, one could claim that Alibaba was not just China’s largest e-commerce retailer but also the world's biggest e-commerce conglomerate.
13
The Alibaba group which started off from its humble beginnings had emerged as an e-commerce empire and its success was attributed to various key factors. (Exhibit I).
Exhibit I Model depicting Alibaba’s key success factors
Source: Pavie Xavier and Luo Yixuan, “Seven reasons for Alibaba’s success”,
https://www.digitalcommerce360.com/2016/07/27/seven-reasons-alibabas-success/, July 27 th
2016
Alibaba had an exceptional business model that provided services to smaller firms and individual traders that unleashed the dynamic forces of this sector. This offered consumers more diverse choices. Whether it was ‘1688 (a B2B e-commerce platform), Taobao, or YiDaTong (the largest Chinese professional import and export agent),’ all of Alibaba’s three mainstay businesses were focused on offering services to small firms, creating value cumulatively that would not have been feasible separately. In 2014, Alibaba had a total transaction volume worth about CNY 2.3 billion ($340 million). Unlike eBay, Alibaba charged only for complementary services such as marketing and tech support, while membership to users was free. Alibaba made money mostly from commercial advertisements and keyword bidding, which accounted to 57% of overall profits. Technical services derived from big data of consumer behaviour helped it to garner the remaining 25% of total profits. By waiving off intermediary charges and enabling merchants to register for free, Alibaba promoted the online transaction trend amongst users. By bringing together a large number of traders in a single platform, Taobao attracted more consumers. In 2016, the Alibaba platform had over 500 million registered users, 230 million active shoppers and more than 8 million active merchants, with yearly orders that surpassed 11 billion. 13
Wright Chris, “So What Exactly Is Alibaba?”, https://www.forbes.com/sites/chriswright/2014/09/16/so-what-exactly- is-alibaba/#1f92ae421943, September 16
th 2014
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The credit model of Alibaba was another success factor that facilitated credibility among customers. All traders on the e-commerce platform were required to pass an online test to validate their identity information. This reduced illegitimate transactions as sellers were overseen throughout. Besides, all transactions were recorded and could be traced by both sellers and buyers. This protected the legality of each transaction and helped buyers select more reliable traders. Also, payments were first transferred to Alipay and released to sellers only when buyers informed that they had received their goods in good state. In 2013, Alipay’s number of users had touched 300 million, while the number of transactions reached CNY 900 billion. ($135 billion). Alibaba provided a hassle free online environment with simplified transactions that facilitated positive user experience and high customer loyalty. The company offered various support services such as training for vendors and an exclusive coding system to handle a huge number of stores. It improved its instant communication tool for enhanced seller and buyer contact and enabled refund of any product within seven days. The e-commerce giant outperformed in leveraging business opportunities and creating customer loyalty. It was noted that the majority of shoppers avoided shopping during the ‘Double 11’ festival held on November 11
th every year, i.e., between Chinese National Day and Christmas. But Taobao had
effectively turned that day into a shopping extravaganza with its massive marketing push. In 2014, the festival had generated over CNY 1 billion for Tmall within the first three opening minutes. In a single day, Taobao had accrued profits of CNY 1.5 billion and a net profit of more than CNY 500 million. Alibaba group looked at new ways of transaction patterns to create added value for buyers according to their requirements. The C2B model reduced expenses in the conventional supply chain and reduced the time required for product turnover, thus increasing consumer satisfaction. Alibaba gathered diverse customers with similar needs to form a dominant buying group that could buy products at a wholesale price. Further, Alibaba leveraged its enormous online consumer behaviour data to develop merchandise in accordance with buyer habits.
14
Any site or mobile app that enabled a shopper to buy a product or service online and receive it offline was an O2O (Online to offline) transaction. For instance, a person buying a burger at McDonald’s using AliPay was an O2O transaction.
15 Using Alibaba’s O2O strategy, buyers could
purchase a product by ‘scanning a two-dimensional code’ and could also show the receipt of an item with a different code. Buyers could also participate in a range of brand initiatives by scanning the subsequent codes to obtain targeted advertisements. To speed up the growth of the O2O service, Alibaba actively utilized ‘mobile terminal domains through Alipay Wallet and partnered with banks to provide code scanning and cash transfer services for payment.’
Contrary to positioning itself as an e-commerce corporation, Alibaba endeavoured for an integrated ecosystem by bringing in simpler ways of doing business for sellers and buyers. Towards this end, Alibaba expanded into diverse areas like ‘logistic network, advertising services, financial services and mobile terminal services.’
16 In short, Alibaba was the pioneering company that offered technology to
many SMEs to enrich themselves. According to the BBC, the overall value of commodities sold on Alibaba in 2014 was greater than Amazon and eBay combined.
17 (Exhibit II).
14
Pavie Xavier, “Seven reasons for Alibaba’s success”, https://www.digitalcommerce360.com/2016/07/27/seven- reasons-alibabas-success/, July 27
th 2016
15 Imtiaz Asif, “Alibaba Is Increasing Its Exposure in The Chinese O2O Market”,
http://paymentweek.com/2016-1-4-alibaba-is-increasing-its-exposure-in-the-chinese-o2o-market-9277/, January 4 th
2016 16
“Seven reasons for Alibaba’s success”, op.cit. 17
Gentlemen Marketing Agency, “Analyze of the Marketing Strategy of Alibaba in China”, http://ecommercechinaagency.com/top-marketing-strategies-to-success-with-alibaba/, September 12
th 2016
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Exhibit II Alibaba’s profit margin for the year 2014
Source: Gentlemen Marketing Agency, “Analyze of the Marketing Strategy of Alibaba in China”, http://ecommercechinaagency.com/top-marketing-strategies-to-success-with-alibaba/, September 12
th 2016
While Alibaba operated an e-commerce ecosystem that redefined online shopping for both retailers and wholesalers in China, it continued to be a major beneficiary of the country’s e-commerce. The company’s ‘closed-loop ecosystem’ and leading position in payments had enabled it to gain a strong foothold in China with a dominant share of nearly 80% with its Taobao and Tmall marketplaces in 2014. (Exhibit III).
Exhibit III Alibaba’s market share in China in 2014
Source: Shepherd Richard, “Alibaba – Proof there are still good investment opportunities in China”,
http://www.denkercapital.com/alibaba-proof-there-are-still-good-investment-opportunities-in-china/
After the unbelievable pace of e-commerce growth in China, the growth rate had seemed to slow down from 2014. (Exhibit IV). Jack Ma, at the 2016 Computing Conference had mentioned about the emergence of ‘New Retail’ model as opposed to e-commerce in the near future.
18 According to the e-
commerce giant, New Retail was a strategy that allowed the business to ‘tap into the entire US$4.8 trillion retail sector in China’ by eradicating the divide between online and offline business
.”19
18
Deng Yuanyuan, “Will e-commerce replace brick-and-mortar stores?”, http://knowledge.ckgsb.edu.cn/2017/02/27/retail/will-ecommerce-replace-brick-mortar-chinese-retailers/, February 27
th 2017
19 McQueeney Ryan, “Alibaba's "New Retail" Concept Threatens Amazon's Global Dominance”,
https://www.zacks.com/stock/news/246634/alibabas-new-retail-concept-threatens-amazons-global-dominance, January 24
th 2017
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Exhibit IV China’s e-commerce growth rate
Source: Roy Sumit, “Chinese ecommerce market set to slow down, and decline, by 10%,”
https://www.slideshare.net/sumitkroy/statistic-id278553- forecastannualgrowthrateofchinasecommercemarketuntil2015-1, April 3
rd 2014
In the wake of this development, Alibaba teamed up with Bailian Group, China’s largest retail conglomerate to boost its efforts in overhauling traditional retail using technology.
20
Can Alibaba’s Bailian Deal Unleash the Next Wave of Growth in Retail? Extending its retail foray with the Chinese Supermarket, Alibaba planned to develop Bailian’s 4,700 stores in China by unifying everything right from consumer relations to payments and supply chain management. The deal finalised in February 2017, was akin to the e-commerce giant’s integration efforts with electronics giant Suning Commerce Group Co. The new partnership was aimed to leverage Alibaba’s big data and technology to revolutionalise ‘the $4 trillion world of domestic brick- and-mortar retail.’ With Bailain, Alibaba intended to build a network that allowed stores and brands to oversee transactions as they occur, eliminating layers of middlemen ‘so that retail outlets could place orders online in real time.’
21
The deal, which did not involve any financial investment in Bailian, was the most recent in Alibaba's growing efforts to seize a larger share of the retail market as online sales growth had slowed down. Earlier, the online juggernaut had invested $4.6 billion for a minority stake in electronics retailer Suning Commerce Group, had purchased a stake in supermarket chain Sanjiang Shopping Club and had led a $2.6 billion bid to purchase mall operator Intime Retail Group.
22
On February 20
th 2017, Alibaba struck a strategic deal with Bailian Group to join forces in six
prominent areas namely ‘omni-channel integration and innovation, new retail technology development, supply chain integration, CRM interconnection, payment solutions and logistics
20
Chen Yilun Lulu, “Alibaba Deepens Retail Foray With New Chinese Supermarket Tie-Up”, https://www.bloomberg.com/news/articles/2017-02-20/alibaba-deepens-retail-foray-with-new-chinese-supermarket- tie-up, February 20
th 2017
21 “Alibaba Deepens Retail Foray With New Chinese Supermarket Tie-Up”, op.cit.
22 Cadell Cate, “Alibaba expands bricks-and-mortar retail push with Bailian deal”, http://www.reuters.com/article/us-
alibaba-bailian-idUSKBN15Z08C, February 20 th
2017
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synergy.’ 23
Shanghai-based Bailian Group was one of China’s largest retail conglomerates by sales, with 4,700 stores in 200 cities comprising supermarkets, pharmacies and convenience stores.
24 Bailian
Group which once used to be a retail giant had of late curtailed its retail business operations due to the company’s poor management. It was the largest retailer in Yangtze Delta, with operations spanning from ‘department stores, hypermarkets, supermarkets, convenience stores, shopping malls and logistics.’ But Bailian’s mismanagement, rigid standard of operating system and overconfidence did not allow the company to transform for contemporary retail. Lianhua, a major retail arm of Bailian Group had reported negative growth and massive loss in the past three years, from 2014. With Alibaba’s partnership, Bailian hoped to grab the opportunity to learn from the pioneer of e-commerce and future retail technologies to amalgamate its offline stores and resources to resume its impetus in retail.
25
Under the agreement with Bailian, Alibaba would not be claiming a stake in the state-owned conglomerate. But the joint venture would integrate ‘their membership databases and use facial recognition technology’ to enhance customers’ experiences.
26
Both the companies together would design brick-and-mortar stores that unified offline and online operations to enhance the overall shopping experience. Alibaba’s online payments system Alipay would be made available at all Bailian stores, ‘while Bailian’s Safepass and Bailian OK Card payments services would be integrated with Alipay.’ The firms would also collaborate on logistics to enhance effectiveness in product deliveries, in addition to R&D pertaining to ‘new retail-related technologies in Artificial Intelligence, big data and the Internet of Things.’ According to Zhang, the omnichannel model which Alibaba termed ‘New Retail’ would not only disrupt relationship between sellers and consumers, but also the conventional models of ‘manufacturing and supply chain management.’ Transformations in technology and consumer behaviour would require businesses to ‘embrace big data and new innovations to better identify, reach, analyse and serve their customers, and their digital transformation would be empowered by Alibaba’s ecosystem.’ Commenting on the partnership, Bailian Chairman and President Ye Yongming said that traditional retailers had to identify and keep up with the changes occurring in their industry, while effectively employing the emerging technologies driving those changes.
27
Alibaba, with an active consumer base of nearly 500 million planned to tap China's entire $4.8 trillion retail economy by building data-driven management tools for traders and brands. According to consulting firm Bain & Company, China's e-commerce market was expected to grow at 18% yearly till 2020, when compared with the usual growth rate of 35% during the past four years from 2013. And though e-commerce had witnessed exceptional growth in China, sales from brick-and-mortar stores had accounted for 84% of total retail sales in China in 2016.
28 Alibaba, which once disrupted the
traditional retail industry in China, had of late realised that e-commerce model alone would not be enough for sustained growth in the long run. An offline presence was considered essential as it allowed shoppers to go to stores to purchase certain items which they wished to see it physically before buying.
23
Qiu Yujun, “A PLOT, Alibaba teams up with Bailian”, https://www.linkedin.com/pulse/plot-alibaba-teams-up-bailian- yujun-qiu, February 21
st 2017
24 “Alibaba extends bricks-and mortar retail push with Bailian deal”,
http://indianexpress.com/article/business/companies/alibaba-extends-bricks-and-mortar-retail-push-with-bailian-deal/, February 20
th 2017
25 Qiu Yujun, “A PLOT, Alibaba teams up with Bailian”, https://www.linkedin.com/pulse/plot-alibaba-teams-up-bailian-
yujun-qiu, February 21 st
2017 26
“Alibaba Deepens Retail Foray With New Chinese Supermarket Tie-Up”, op.cit. 27
Brennan Tom, “Alibaba, Bailian announce ‘new retail’ deal”, http://www.alizila.com/alibaba-bailian-announce-new-retail-deal/, February 20
th 2017
28 “Alibaba expands bricks-and-mortar retail push with Bailian deal”, op.cit.
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Rather than launching its own physical stores on a major scale, the company collaborated with large retailers in the country and provided them the required technology to make their systems more efficient. This enabled Alibaba to study the offline shopper behaviour through data gathered from these computerised processes and to work on the unification of online operations with offline stores. Industry analysts hoped that the strategic affiliations served as the building blocks for the future of retail, where Alibaba envisaged a unified offline and online ecosysytem. The model seemed to enable Alibaba to hone its pillars of retail and upgrade long-established retailers to become an essential part of the new retail. By means of partnerships with several such established retailers, the company seemed to ‘capture the next wave of growth in retail in the country.’
29
The partnership with Bailian was considered a major milestone in the development of ‘new retail,’ where the division between online and offline commerce had become outdated, as consumers switched to mobile phones from desktop computers. Alibaba said that under this new retail model, traditional brick and mortar store owners would be offered the tools to change their way of connecting with customers, and enhance effectiveness in their inventory and distribution network, in addition to payment and logistics systems to provide amazing user experience for both online and offline customers.
30
The partnership would also allow Alibaba to leverage the logistics capabilities of Bailian in Shanghai. Bailian had constructed a 100,000 sqm central distribution centre in Shanghai that supported omni- channel requirements. This distribution forte of Bailian offered Alibaba an opportunity to bolster its presence in the regional market. This would also enable Alibaba to better compete with its closest rival JD.com in supply chain management and warehousing as the latter company had built ‘Asia No 1 - smart logistics centre in Shanghai.’
31
According to Analyst Lei Yang of CIMB Group, both Alibaba and Bailian seemed to gain from the strategic agreement. While traditional retail still comprised the bulk of consumer expenditure in China, the partnership gave Alibaba access to Bailian’s customers when its own growth was slowing down. Putting Alipay in Bailian’s stores would help the company to boost its impact in China’s online- payment battle as competition with Tencent’s WeChat Pay intensified. Bailian, meanwhile, had been losing market share and could utilise access to Alibaba’s technology, including its troves of customer insights and e-commerce expertise to expand online. “They also don’t have a strong online retail platform, so cooperating with Alibaba, which is the strongest e-commerce platform in China with a long-term and good track record on how to attract customers and good logistics network, would help them improve their market share,” added Lei Yang.
32
Although the news of Alibaba’s Bailian Group agreement showed shares in Bailian Group firms surging, industry experts were wary of the deal as they felt that it might take several years for big data to make remarkable difference to earnings. According to Shanghai-based retail Analyst Ben Cavender at China Market Research Group, “There is a big push right now across brands to try and figure out how to mix physical and online shopping but gains so far have been limited.” Both the
29
Team Trefis, “Alibaba’s Next Big Move In Retail: Partnership With Bailian Group”, https://www.forbes.com/sites/greatspeculations/2017/02/28/alibabas-next-big-move-in-retail-partnership-with- bailian-group/#681c21c21fa5, February 28
th 2017
30 Estopace Eden, “Alibaba to explore ‘new retail model’ with Shanghai's Bailian Group”,
http://www.enterpriseinnovation.net/article/alibaba-explore-new-retail-model-bailian-group-690581516?qt- most_read_node_recommend=1, March 6
th 2017
31 Lam Teresa, et al., “Alibaba Bailian Group announced new retail strategic partnership”,
www.fbicgroup.com/sites/default/files/Alibaba_Bailian.pdf, February 2017 32
Horwitz Todd, “Alibaba going to brick and mortar”, http://www.ntmarkets.com/2017/02/alibaba-going-brick-mortar-todd-horwitz-cms-bubbatrading-com/, February 21
st
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companies would at first collaborate on supply chain technology using Alibaba's big data competencies and would combine Alipay payments with Bailian Group's current membership program.
33
‘With a vision of the future of retail,’ where the divide between online and offline retail had become blurred and models ultimately seemed to converge, Alibaba aimed to position itself as a strong contender in the evolving retail landscape. While both companies worked towards integrating offline stores with an online ecosystem, it remained to be seen if the partnership would enable to capture the next wave of growth in retail in the country.
34 Would the strategic deal become a building block
for the future of retail, where Alibaba predicted a unified offline and online ecosystem? Would the companies leverage the power of big data to achieve integration between offline and online stores to enhance efficiency and deliver superior user experience?
33
“Alibaba expands bricks-and-mortar retail push with Bailian deal”, op.cit. 34
“Alibaba’s Next Big Move In Retail: Partnership With Bailian Group”, op.cit.
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