‘More Mall’ Embodies The Full Suite Of Alibaba’s Prowess – Alibaba Group Holding Limited (NYSE:BABA)

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Introduction

Alibaba (BABA) was recently reported to be building its own shopping complex dubbed “More Mall.” The five-story mall would be situated near Alibaba’s headquarters in Hangzhou, the capital city of the Zhejiang province in East China. Construction is said to be well underway and is scheduled for an April 2018 opening. In this article, I will elaborate on the rationale for Alibaba having its own mall. I also will suggest a property developer which Alibaba should partner with in its quest to move into offline presence.

Alibaba’s Impetus For Its Own Mall

The impetus for a company-owned mall is the liberty to deploy the various in-house technologies developed. Early this month, Alibaba announced the ability for customers of KFC (YUMC) in the city of Hangzhou to make payments for their purchases by simply smiling at a 3-D camera. It seems like a great idea for a nation of consumers highly receptive to the adoption of digital payment. However, a complete rollout would not be easy as the company needs to convince business owners who might be averse to new technologies. There could be ground staff resistance, operation hiccups due to system instability, and the risk of customer confusion. Pertinently, the issue of the startup costs and the subsequent per transaction charges also could turn early adopters away. There would be less of such obstacles if Alibaba is to implement such a payment method in its own mall.

KFC – Alipay Smile-to-Pay Self-Ordering Kiosk(Source: Yum China)

Alibaba Malls Could Serve As A Central Kitchen For The Fulfillment of Online Orders

Alibaba is a strong contender in the food delivery business in China. Together with its finance arm, Ant Financial, it made a $1.25 billion investment in food delivery start-up Ele.me last year. Interestingly, Alibaba also has an in-house Ele.me competitor, Koubei. Last month, a key player in the food delivery business threw in the towel, selling its stake in its food delivery unit to Ele.me. This leaves Tencent-backed (OTCPK:TCEHY)(OTCPK:TCTZF) startup Meituan Dianping as the sole worthy competitor to Alibaba’s units. With the vast customer database and the information gleaned from repeat orders, Alibaba has deep insights into the dietary preferences of a large segment of the population. It could perform data analytics to determine which dining options would work best for the particular location of its malls. The F&B outlets in the malls could then serve as both a physical dine-in option and as a central kitchen for online orders in the neighborhood to be fulfilled by Alibaba.

Online Retailers Could Be Invited To Open Physical Stores In Alibaba Malls

The same strategy can apply to consumer goods. Retailers on Taobao, Alibaba’s B2C online platform, that have strong sales for the locale could be invited to set up a physical presence in its malls. Consumers who might want to see and feel in-person the goods before purchasing would then be able to do so. For items like mattresses and sofa, a tryout in person would be most ideal. Even if the physical outlet has no walk-in business, it could serve as a packing and distribution center for the online orders received or act as a mini-warehouse. Since it has already been determined that the potential customers are living nearby, that means, in the event of returns, customers would be able to do so conveniently.

Of course, any consumer goods company which has already been selling online would have the information of their customers. What’s superior about Alibaba’s database is the potential to identify which other retailers not already having customers in the particular locale would be able to succeed based on the buying patterns of the consumers in that area. It is akin to Amazon’s (NASDAQ:AMZN) various recommendations in the spirit of “You might also be interested in” type of functionality and which as you would expect, Taobao possesses such recommendation engine similarly. However, this time around, Alibaba would use the feature to help itself to uncover which retailers it could encourage to add a physical presence in its malls to increase its visibility and expand its customer base.

Tap on Alibaba Pictures To Create Experiential Activities In The Malls

Besides increasing F&B options to bring in customers physically, malls are turning to offering myriad experiential activities to keep customers coming. There are those who cater to the kids – indoor playgrounds, specialized classes like ballet and martial arts, etc. There also are malls that focus on the adults – indoor skating, rock-wall climbing, and the usual cinemas. Alibaba has an entertainment arm – Alibaba Pictures Group – which recently teamed up with Beijing Jingxi Culture & Tourism, co-producer and major distributor of China’s top-grossing film, Wolf Warrior II. Its box office reached 5.2 billion yuan (US$782 million) in just four weeks, the highest ever for a Chinese film. The strategic partners plan to “collaborate in areas involving content investment, promotion, and distribution as well as movie-related merchandise.” Alibaba could tap on the success of the movies to create experiential setups like in the form of the Jurassic World, Transformers Autobot Alliance, and Marvel Avengers S.T.A.T.I.O.N franchises. One such interactive exhibition has been set up in Beijing with good reception. Alibaba’s malls would be an ideal location to house these exhibitions which would hopefully result in spillover footfalls to the other tenants in the malls.

An Integrated Venue For Alibaba’s Hema Supermarkets

Last but not least, a mall would provide Alibaba’s refreshing take on supermarkets, Hema, an integrated venue. Hema is Alibaba’s attempt at creating a “new retail” concept which taps on customer data and uses technology to combine online and offline shopping. The company aims to “provide the unparalleled service of fresh food deliveries in 30 minutes,” Alibaba Group CEO Daniel Zhang told Alizila. Since Alibaba has no intention to turn Hema into a large grocery chain on its own but rather as a proof-of-concept for its new retail model, it would be better housed in the company’s malls where other businesses can be integrated. Fellow tenants would be able to capitalize on the supermarket’s novelty effect to drive their own sales. They also would be able to tap into its smart logistics technologies and adapt them for their own deliveries.

Alibaba’s founder, Jack Ma, feasting on seafood purchased and cooked right at the venue itself, the Hema supermarketJack Ma dining at hema supermarket

(Source: Alizila)

Alibaba’s Offline Retail Shift Needs An Established Partner

For Alibaba’s shift to offline retail, it might be unwise for Alibaba to go it alone as it requires a separate set of knowledge and experience. In this area, Alibaba has no lack of potential partners, given the numerous department store and shopping mall operators in China. Nevertheless, in my opinion, one of Asia’s largest real estate companies based and listed in Singapore, CapitaLand (OTCPK:CLLDF)(OTCPK:CLLDY) would serve as an ideal partner. Despite its headquarters in Singapore, CapitaLand makes the majority of its revenue in China. 64% of its shopping mall properties by number (and 53% by value) are located in China. What’s most pertinent is its strong presence in the fast-growing Southeast Asia (44% by property value) and India (7% by property number).

CapitaLand Malls by Geographical Locations

Capitaland - Property Geographical Locations

CapitaLand Provides The Experience and Expertise Into Southeast Asia – A Fast Growing E-Commerce Market

Jack Ma has made clear his attention in Southeast Asia. Malaysia is the first country where Starbucks (NASDAQ:SBUX) stores are able to accept Alipay, a payment system operated by Alibaba’s finance affiliate – Ant Financial. Jack Ma has several high-profile meetings with the country’s top officials, including the Prime Minister. In Indonesia, the government has since last year sought to make Jack Ma the country’s digital economy adviser. Mr. Ma agreed to it last month, and he would be looking into helping the country roll out ICT infrastructure and payment systems. For Thailand, Mr. Ma has already made plans to visit later in the year “to upgrade our partnership in all major digital fields covering e-commerce, logistics, finance, payments, and travel.”

It is not difficult to understand Alibaba’s interest in the region. Maybank economists Chua Hak Bin and Lee Ju Ye said in a report that e-commerce sales in Southeast Asia “could grow to 5 percent to 10 percent of overall retail purchases over the next five years.” This meant that online sales could more than double from the present share of less than 4 percent. Looking from the country level, an A.T. Kearney analysis projected that the growth of Malaysia’s e-commerce market could double by 2020.

Growth of Malaysia e-commerce market could double by 2020

The proliferation of e-commerce sales is supported by the rising discretionary income. The World Economic Forum forecasted that the working-age population of South-East Asia will continue to rise faster than the global average. Indonesia was singled out for its more than doubling in its “consuming class”, defined as people living in cities with more than 200,000 inhabitants. The number of households at these income levels was projected to grow from 34 million in 2013 to 74 million in 2030.

McKinsey - Working-age consumer consumption levels

Based on a study released in January 2017 conducted by Hootsuite, the percentage of internet users as a percentage of the population in Southeast Asia is higher than the global average (53% versus 50%, respectively). In fact, the number of internet users jumped 31% last year alone. The reported number of internet users was 339.2 million, more than the population of U.S. This speaks volume of the potential of Southeast Asia and bodes well for the e-commerce business of Alibaba.

Digital growth in Southeast Asia

Neither Jack Ma nor Alibaba has discussed publicly Vietnam. Nevertheless, it is an important market in Southeast Asia, and CapitaLand also could facilitate Alibaba’s entry into Vietnam. It has recently embarked on its first commercial development in the country and would have gained substantial operating experience that it can share with Alibaba. Vietnam has been Southeast Asia’s top performer since 2015 and is poised to retain its crown this year, supported by strong Foreign Direct Investments (9% growth in FDI in 2016) into the country.

CapitaLand’s International Grade A Office Tower In Central Ho Chi Minh CityCapitaland

CapitaLand Has Proven Track Record In Navigating The Challenging Retail Climate

Despite the oft-mentioned “death of retail” phenomenon, CapitaLand malls appeared to have bucked the trend. Its malls reported positive shopper traffic growth in its key markets, indicating its ability to attract footfalls to its shops. The higher shopper visitations also have translated into actual sales, with tenants’ sales growing as much as 22.7% in India and a solid 11.1% in Japan, a supposedly mature market. This set of operational statistics clearly demonstrates the worthiness of CapitaLand as a credible and reliable partner for Alibaba’s venture into the brick-and-mortar retail format.

CapitaLand Malls Operational HighlightsCapitaland Malls operational metrics(Source: CapitaLand)

CapitaLand also has extensive experience in mixed developments, i.e. integrated complexes which include shopping malls, office buildings, residential units, and/or hospitality assets. This comprehensive set of expertise would prove useful to Alibaba as it seeks to extend its suite of offerings beyond e-commerce. For instance, Alitrip, Alibaba’s travel booking service, can tie up with CapitaLand’s Ascott serviced residence unit to jointly market for clients.

Raffles City – CapitaLand’s Integrated DevelopmentRaffles City China(Source: CapitaLand)

A Sign Of Things To Come?

In fact, Alibaba and CapitaLand have already begun to collaborate, with each party lending their expertise – e-commerce and property development/management respectively – to Alibaba’s new headquarters in Shanghai. CapitaLand will oversee the pre-opening and management of the shopping podium and one of the four office towers at the HQ named Alibaba Shanghai Center. On the other hand, CapitaLand will launch an exclusive online mall on Lazada Singapore, which is part of Lazada Group. Alibaba has recently raised its stake in Lazada Group to 83%. If the initial collaboration works out well, a further extension of their partnership would be a win-win for the two companies.

Facade of Alibaba Shanghai Center (artist’s impression)Facade of Alibaba Shanghai Center (artist(Source: CapitaLand)

Conclusion

Alibaba is undoubtedly a very innovative company. It has ventured far and wide from its e-commerce business and now engages in multiple businesses in different industries. Its latest foray into brick-and-mortar shopping malls is a necessary decision to develop and showcase its myriad in-house technologies. To bring the strategy to a higher level, I believe it should partner with CapitaLand to build on its experience in shopping malls and real estate management. For its expansion into fast-growing Southeast Asia and India, CapitaLand would serve as an ideal partner due to its extensive and established operations in the two regions. A deepening in the strategic alliance between the two would be a win-win situation for both.

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