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Alibaba bets on 'new retail' to stay fresh amid China slowdown

Ahead of earnings report, executives talk up connecting physical and online markets

HONG KONG -- Chinese e-commerce leader Alibaba Group Holding is putting more emphasis on linking offline retailers with online shoppers as it looks to sustain its growth amid the country's economic slowdown.

As Alibaba prepares to release October-December earnings on Wednesday, investors and analysts are looking for signs as to whether the group can withstand China's economic adjustment, which saw annual growth fall to 6.6% last year -- the slowest pace since 1990.

Alibaba founder Jack Ma Yun was using the term "new retail" -- used to describe the integration of online and offline retail -- as early as 2017, and executives have been talking up the approach more often as they face doubts over the company's earnings prospects.

"In the next five years, you will see the entire retail sector becoming a lot more digitized," Joseph Tsai, Alibaba's co-founder and executive vice chairman, said at a Reuters event last week.

Alibaba began offering technology this month to transform brick-and-mortar shops. CEO Daniel Zhang Yong said during the launch event that "all companies will need a brand-new way to operate" in the digital economy era.

The company logged lackluster earnings in the July-September period, missing analyst expectations for both revenue and net income. In November, Alibaba slashed its 2018 revenue forecast by 4% to 6%, predicting 375 billion to 383 billion yuan ($55.6 billion to $56.8 billion).

E-commerce newcomers including Pinduoduo, which uses social media data to target consumers, are snatching market share from the leader. New York-based research company eMarketer forecasts Alibaba's online market share to fall by nearly 5 percentage points to 53.3% in 2019.

But Tsai rejected the idea that China's economic slowdown will dent the company's growth trajectory, saying people are overly worried about "Alibaba's growth in the context of China."

Alibaba's annual Singles Day online shopping event on Nov. 11 once again set a sales record, reaching 213.5 billion yuan, though the growth was slower compared with the previous year.

The new retail approach could provide a boost in the long run despite hefty initial costs, Tsai said, citing Alibaba's online-offline supermarket Hema Xiansheng. The premium grocery chain enjoys better cash returns than Alibaba's online marketplace business, he said.

A typical Hema store needs about a year to break even, and online orders account for about 60% of the total, research from brokerage Jefferies shows. Women ages 25-45 contribute the most to sales, with a repeat purchase rate topping 80%.

Hema has opened more than 100 physical stores across China, and Tsai said the nationwide network expansion still "has a long way to go."

Applying data analysis technologies lets retailers identify their customers, including their purchase histories, the moment they walk into a store, Tsai said.

Analysts fear the big investments in the new retail model could weigh on Alibaba's profit margins.

The model "requires investment in marketing, [capital expenses] and acquisitions to solidify its market positions in the next few years," analysts at Fitch Ratings wrote in a recent report. But they think Alibaba has adequate cash generated from its core e-commerce business to fund this new ambition.

Alibaba's smaller rival JD.com also has opened physical stores that integrate online and offline experiences. The company launched a similar fresh-food supermarket chain called 7Fresh last year and plans to open 1,000 stores in the next three to five years, Wang Xiaosong, the chain's CEO, said in September.

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