Shares of Alibaba went up 1.82% on Thursday while Kroger shares went up 3.02% after The New York Post and Reuters reported that the two retailers had spoken about a potential partnership.
Details are sparse, but the two are at least talking about working together. "Alibaba has dialogue with hundreds of businesses around the world everyday about expanding commercial relationships and reaching Chinese consumers, and Kroger is an example of just that," Alibaba said in a statement. China's Ministry of Commerce noted earlier in January that "Alibaba has teamed up with Kroger [and other companies] to speed up the integration of online and offline sales ... "
So why would Alibaba, whose revenue increased about 60% year-over-year to $8.34 billion last quarter, need Kroger? Let's dig a little deeper.
Why Alibaba needs Kroger
Alibaba, which operates broadly in categories including e-commerce, cloud computing, and digit media and entertainment, has been on a tear in the past few years.
Last quarter, Alibaba raised its fiscal 2018 revenue growth guidance to between 49% and 53%, up from its previous prediction of 45% to 49% growth. This is coming after it reported 56% revenue growth to $23.3 billion for the 2017 financial year ended in March 2017.
While Kroger reported a 4.5% uptick in total sales last quarter for a revenue of $27.75 million, it's still far from safe and is lagging in technology and capital compared to its competitors. The stock is down about 8% over the past year after taking hits in June with a disappointing first-quarter report and the announcement hat Amazon was buying Whole Foods.
So why would Alibaba be entertaining a potential partnership with Kroger? The short answer is that Alibaba wants to enter the U.S. but it's going to have trouble doing so on its own.
Although Alibaba said last year that its global expansion plans are focused more on Asian and developing markets, rather than the U.S. and Europe, it can't ignore the potential of retail sales in the world's third-most-populous country. And timing is everything as grocery names in the U.S. rush to stake a claim on their market share in fear of the Amazon/Whole Foods giant taking the whole pie.
In early January, the U.S. government blocked a deal for Ant Financial Services Group, an affiliate of Alibaba, to buy U.S. money transfer firm MoneyGram. Regulators rejected the $1.2 billion takeover due to national security concerns, seemingly due to the data on U.S. citizens that would be invovled. Alibaba may be looking at Kroger as another way to enter the U.S. However, if regulators were wary of the Moneygram deal, they would most likely also be wary of Alibaba getting too tight with the third-largest U.S. retailer.
Alibaba has tried before to enter the good graces of the U.S. Last year, Alibaba promised to create 1 million jobs in the U.S. by 2022 by helping U.S. businesses sell their products on its China-based e-commerce platforms.
Why Kroger needs Alibaba
It's easy to see that struggling retailer Kroger could benefit from both Alibaba's capital and its technology.
Amazon recently opened its first Amazon Go store, which allows customers to buy groceries without having to check out with a cashier. Instead, people can walk out with their selected items and cameras and sensors will determine what was taken and bill the person through their Amazon account.
Alibaba has been running a similar store concept in China for over two years with its Hema grocery stores, which are meant to combine the best of offline and online shopping, allowing customers a variety of shopping choices, such as ordering something from the store to be delivered to their house or ordering something online to pickup at the store. In addition, customers pay through a mobile app.
The 20 Hema stores located throughout China are meant to serve customers within a 3-kilometer radius and can deliver orders within a half-hour. So far, the results have been positive. Customers make 4.5 purchases per month on average and online sales make up an average of 50% of total orders for the stores, Alibaba reported.
However, it's important to note that Alibaba has been clear that it doesn't want to run a grocery chain. The Hema stores are simply a prototype to show off how Alibaba can help other retailers transform their brick-and-mortar locations into more efficient stores that provide a better experience for customers.
This is key because it means that Kroger could use the Hema concept to open its own high-tech stores in the U.S. as a way to compete with the new Amazon Go stores.
Supply chain consultant Brittain Ladd, who's known for predicting an Amazon/Whole Foods deal in 2013, mentioned the possibility of Kroger using the Hema tech in a post just after Amazon bought Whole Foods, saying a combined Kroger/Alibaba could take on Amazon and Wal-Mart.
With Alibaba's help, Kroger could outpace Amazon in opening high-tech stores across the U.S, Ladd said. As Amazon proved last June with Whole Foods, one overnight move can drastically change up the leaderboard in the grocery sector. Even if this possible partnership falls through, it tells us that the grocery sector is still far from settled.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Natalie Walters has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.