Digital Giant Alibaba's Profit Tumbles As It Pursues Physical Expansion

The law of big numbers is presenting all digital giants with a conundrum: they feel compelled to continue growing, but the avenues open to them to achieve their goals at scale are either highly competitive - like cloud services - or expensive and managerial time-sinks - like retail.

Alibaba is trying both and discovering that success in its first act was probably far easier than it's second will be. JL


Raymond Zhong reports in the New York Times:

Heavy spending on Alibaba’s businesses outside of e-commerce, including cloud computing and brick-and-mortar retail — which the company likes to call “new retail"  are part of Alibaba’s plan to broaden its empire and become a full-service technology company akin to Google. It is expanding its footprint in physical retail, to collect more different kinds of data about customers’ habits and desires. But compared with being an online middleman, running stores in the real world is costly and complex.

Alibaba, the online shopping giant, is increasingly going offline. That is making some investors nervous.

The Chinese company  reported a fall in profit of nearly 30 percent in the latest quarter, the first such decline in a year and a half. One reason: Alibaba got a bump in profit last year from selling its shares in a social media app. Another culprit, however, was heavy spending on Alibaba’s businesses outside of e-commerce, including cloud computing and brick-and-mortar retail — which the company, counterintuitively, likes to call “new retail.”

Those ventures are part of Alibaba’s plan to broaden its empire and become more of a full-service technology company akin to Google. But some investors appear to be fretting about the cost of such expansion to the company’s profits. Alibaba has already lost around $60 billion in market value since its shares peaked in January.

They remain well above their level a year ago, however, thanks to strength in Alibaba’s core online business. In the first three months of the year, total revenue increased by more than 60 percent over the same period last year, the company said Friday. It added that it expects a similar pace of sales growth for the coming financial year.

For what has become one of the biggest internet companies on the planet, figuring out how to get even bigger was never going to be straightforward. Or cheap.

In March, Alibaba poured an additional $2 billion into its Southeast Asian online emporium, Lazada, which is duking it out with Amazon in the region. Back at home in China, the company is investing heavily in its entertainment and cloud services businesses, both of which lose money. And it is rapidly expanding its footprint in physical retail, to collect more different kinds of data about customers’ habits and desires.

But compared with being an online middleman, running stores in the real world is costly and complex. Hema, the company’s chain of high-tech supermarkets, now has dozens of stores across China, a large chunk of which opened in the first four months of this year alone.

Modest minimarts these are not. A typical store might feature tanks of live lobsters and crabs, a bar with beer on tap and a grill where steaks are cooked to order. Bags of groceries zip on conveyors above shoppers’ heads on their way to being delivered to nearby homes.

Fresh food aside, Alibaba has also invested in an electronics retailer, a home-improvement chain and a department store operator. Recently, it opened a mall in its home city, Hangzhou. It took control last year of its logistics affiliate, Cainiao, and in April it swallowed up a food-delivery service, Ele.me.

All of these could someday help turn Alibaba into the vast digital enabler of on- and offline commerce that it wishes to be. But for now, they are new and unfamiliar activities for a company that prides itself on not owning much in the way of merchandise, warehouses, delivery trucks or other physical assets.

It does not help that the company’s archrival in China, the internet conglomerate Tencent, is also storming into many of these same businesses, including traditional retail.

“I like Hema,” said Tian X. Hou, founder of T.H. Data Capital, a research firm in Beijing. “But Alibaba management is going to have to do a lot of thinking, and go through a lot of trial and error.”

Despite investors’ worries, Ms. Hou said, Alibaba executives are at least sounding more resolute about their commitment to this new, offline future for the company.

“They are fully communicating with the Street: ‘We’re doing it. And we actually do not care what you think, because we think it’s great, and it is the way to reach offline customers. It’s the way to sell in product categories that are not sold online. It is the way for us to expand.’”