Please ensure Javascript is enabled for purposes of website accessibility

Alibaba Could Take Kroger to the Next Level Fast

By Rich Duprey - Feb 11, 2018 at 11:16AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A combination of the Chinese e-commerce giant and the U.S. grocer would be hard to beat.

Supermarket giant Kroger (KR 1.71%) reportedly has been in talks with Chinese e-commerce leader Alibaba (BABA 2.04%) about forming a partnership that, if it comes to fruition as many pundits are speculating, would be a difficult combination to beat. It would be an alliance that spanned food, merchandise, and technology, and would cross over between the online and offline world.

If that also sounds like, that's no coincidence, as Kroger has recognized the need to respond to the e-commerce giant's aggressive move into groceries. Kroger was shaken by Amazon's acquisition last year of Whole Foods Market, with its stock losing 35% of its value on the news, and with the opening to the public of the first cashier-less Amazon Go supermarket, the largest U.S. supermarket chain needs an effective response to the threat. Alibaba could very well be the tip of the spear in fending off Amazon's advance.

Kroger employee in the produce department

Image source: Kroger.

Kroger's adapting

Kroger has been throwing a lot at the wall lately. It announced its intention to add private-label clothing to its grocery stores, and rumor has it it's in talks about an alliance with Ace Hardware. It's also reportedly made overtures to acquire Boxed, an online wholesaler, as well as, the online closeout retailer that's now focusing more on cryptocurrencies than home goods.

The grocery store chain has also been rolling out more of its own technology, with intentions of expanding its Scan Go Bag technology that allows customers to largely avoid the bottlenecks that occur at checkout. Simply scan your purchases at the time you pick them up from the shelf, then at a self-checkout register the scanner or mobile app tallies your total, and you're done.

But a partnership with Alibaba could bring a whole new level of technological innovation to Kroger. Similar in many ways to Amazon, Alibaba could provide the grocer with more avenues for selling food and merchandise online, allow it to add the Alipay payment platform to its portfolio, and provide significant logistical support for home delivery.

It wouldn't be a one-way street, with Kroger reaping all the benefits. While Alibaba does have a physical U.S. presence -- data centers for its cloud-computing business -- aligning itself with Kroger could give it an immediate and substantial brick-and-mortar footprint.

Person using scanner on Alipay app

Image source: Alipay.

A magic carpet ride to U.S. growth?

Despite the decline in retail, with many players closing stores by the hundreds, Alibaba has been looking for ways to further integrate the online and offline aspects of its business with the help of its logistical prowess. It has been opening a network of stores in China to achieve that synergy as part of its "new retail" strategy.

Through a chain called Hema, the Chinese e-tailer allows customers to scan products on its shelves to learn more about them or to find similar ones. All items are linked to the Alipay platform to allow the customer to purchase them. The stores also serve as fulfillment centers for purchases customers make online.

A partnership with Kroger would give it instant access to the same potential with the grocer's 2,790 stores and could break the Amazon and Walmart hegemony in retail by creating a competitor with the financial wherewithal to respond to the challenge. Some analysts say it would make sense for Alibaba to acquire Kroger.

A worthy opponent

If a merger occurs, Kroger would become even more of a powerhouse in groceries, and a solid investment candidate. It's already a quality company that has been knocked back due to the investments in pricing it needed to make to compete with Amazon and Walmart. The Amazon purchase of Whole Foods scared the market scared the market with its potential to create a new, more powerful rival to Kroger.

Yet Kroger has shown an ability to adapt to the changing consumer landscape and a willingness to make the investments it needs to remain competitive. While some of its ideas seem to go off on a tangent, like the apparel business set to launch in the fall, which will take away space from its groceries, others show it is looking beyond the narrow confines of what a grocer is or could be.

The reported Boxed and Overstock overtures would indicate Kroger does have its eyes set on melding the on- and offline worlds; a partnership with Alibaba would be the pinnacle of that strategy and would make its business and its stock tough to beat.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Kroger Co. Stock Quote
The Kroger Co.
$48.14 (1.71%) $0.81
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
$116.00 (2.04%) $2.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.