Alibaba faces reckoning with once-vaunted ‘new retail’ strategy

In 2017, “new retail” began appearing in Alibaba’s earnings reports. Coined by the Chinese e-commerce behemoth, the term refers to the seamless integration of online and offline retail. Six years later, Alibaba is having a moment of reckoning with this strategy as it looks to offload some of its offline retail assets.

On its recent quarterly earnings call, Alibaba’s chairman Joe Tsai revealed that the firm has formed a capital management committee to work on divesting “non-core” assets, including several physical retail businesses.

“[It] makes sense for us to exit these businesses, but this will take time given the challenging market conditions, but we’ll continue to work on it,” said Tsai on the call.

Right before Alibaba posted its earnings, Reuters reported that the ecommerce company was looking to sell its tech-powered grocery brand Freshippo and RT-Mart, a 26-year-old supermarket chain. Nine months into Alibaba’s 2024 fiscal year, the firm has exited $1.7 billion worth of non-core investments, according to Tsai.

The development is a divergence from Alibaba’s once-vaunted new retail strategy. “Ecommerce”, so goes Alibaba’s annual report in 2017, will be replaced by new retail where “the distinction between online and offline retail becomes obsolete.”

The biggest trend we see is the integration of offline and online retail for a new, reimagined retail experience, where the interactions among consumer traffic, inventory location and retail space are transformed by leveraging big data and mobile Internet technologies. For example, consumers can place orders via their mobile phones as they shop for and try out products in a physical retail store, aided by location based recommendations. We believe we will play a critical role in this transformation by leveraging our consumer scale, data and technological capabilities to elevate theconsumer experience and improve efficiency across the entire value chain.

For six years or so, Alibaba worked on fulfilling this mission, hoping that someday it would take a big cut out of the offline economy because it had the consumer data and technology to upgrade traditional retail.

In 2016, the internet firm ventured into the brick-and-mortar retail space by opening its supermarket chain, Freshippo, which features self-checkout stations with face-enabled payments and ceiling conveyor belts that ferry inventory around. Users can place orders online through its app, which displays items based on one’s shopping record. Payments are, unsurprisingly, settled through Alibaba’s affiliate fintech platform Alipay. Alibaba’s algorithms then calculate the most efficient route for its network of logistics workers to deliver orders, which normally arrive in 30 minutes for customers living within three kilometers of a Freshippo location.

Alibaba continued to build out its offline retail empire by teaming up with outside players. In 2017, it invested $2.88 billion in Sun Art, which owns the RT-Mart chain; then in 2020, it shelled out another $3.6 billion, giving it a 72% controlling stake in the supermarket operator.

The physical retail space turned out to be a bloodbath in China. Three years of COVID-19 disruptions coupled with the rise of cheap ecommerce goods have led to shrinking offline spending. A shift to focus on “in-store experience” (think Muji and Ikea) has done little to revive in-person shopping, as Chinese consumers tighten their belts in the ongoing economic downturn. Retail operators find themselves contending with increasingly price-sensitive consumers, while still grappling with persistently high rental rates.

Alibaba is now taking a strategic shift back to its core focus of online businesses, i.e. ecommerce and cloud computing. This move is essential — and urgent — in light of the meteoric rise of its archrival PDD. With its deals platform Pinduoduo in China and Temu for overseas users, PDD has been closing in on Alibaba’s dominance in China’s ecommerce space.

“We concluded that to maintain our competitive edge, we must increase our investment in core capabilities and adopt a more aggressive approach toward competition in order to win growth,” said Eddie Wu, Alibaba’s chief executive officer on the latest earnings call. New retail is obviously not one of the giant’s key growth drivers anymore.