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Alibaba Has Ambitious, Amazon-Like Offline Plans

December 12, 2017, 11:30 AM UTC

When news broke in late November that Alibaba (BABA) was investing nearly $3 billion for a 36% stake in China “hypermart” operator Sun Art Retail, it looked like the Chinese e-commerce titan was stealing a page from Amazon’s playbook. Amazon (AMZN), after all, had months earlier stunned U.S. supermarket operators by snapping up high-end grocer Whole Foods for more than $13 billion.

In fact, Alibaba already was further along the online-to-off-line curve than its U.S. doppelgänger. The Chinese behemoth has been thinking about physical retail for years, part of an effort to attract customers to its e-commerce platforms by helping to digitize old-fashioned merchants. Alibaba has pumped billions into investments including its own grocery chain, a shopping mall group, an electronics retailer, and now the Walmart-like Sun Art. (Indeed, Walmart (WMT) and Sun Art compete in China.)

Alibaba has proved itself a canny innovator, prompting speculation about its intentions. It’s not simply a hunt for new revenues. “We don’t view this as purely physical retail, but rather as an opportunity to transform from physical to digital,” says Alibaba CEO Daniel Zhang in an interview with Fortune. “We still need physical stores, but we want to redefine the experience.”

Inside an Alibaba Group Holding Ltd. Hema Store
An employee assists a customer while she selects live seafood at one of Alibaba’s Hema stores in Shanghai.Qilai Shen/Bloomberg—Getty Images
Qilai Shen/Bloomberg—Getty Images

The purest manifestation of Alibaba’s online/off-line ambitions is Hema, a digital-first supermarket chain it incubated in Shanghai. Consumers shop using a mobile app, either in person or remotely. Shopping options include buying food to take home, purchasing in store and getting help cooking a meal, and buying online with 30-minute delivery. Zhang calls Hema a “new animal” that caters to the “lifestyle of our customers.” Alibaba has opened 20 stores and plans a rapid expansion, including franchises.

Alibaba portrays its move into physical as consistent with its history of helping merchants sell their goods—and taking a cut in the process. (Unlike Amazon, Alibaba isn’t an online retailer; rather it’s a marketplace for other merchants.) Zhang notes that e-commerce accounts for only 15% of consumption in China, making for fertile ground to collaborate with (read: sell services to) off-line merchants. Thus, Alibaba tested cashierless checkout at Hema—Amazon is trying this at its physical bookstores—and is now bringing it to Sanjiang Shopping Club, a discount grocery chain in which Alibaba has invested $300 million. At shopping mall company Intime Retail, another investment, Alibaba is experimenting with augmented-reality shopping features.

There’s a subtler benefit to investing in physical retail. Dali Yang, a Chinese-born political scientist at the University of Chicago, points out that supporting off-line retail helps preserve domestic jobs, which pleases employment-conscious Chinese government officials. Amazon also frequently trumpets its job-creation prowess. It all makes one wonder: At what point will the world not be big enough for Alibaba and Amazon to coexist?

A version of this article appears in the Dec. 15, 2017 issue of Fortune with the headline “Alibaba’s Ambitious Off-line Plans.”