Supermarket giant Kroger (NYSE:KR) reportedly has been in talks with Chinese e-commerce leader Alibaba (NYSE:BABA) 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 Amazon.com, 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 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 Overstock.com, 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.
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.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey 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.