SHANGHAI -- After making a foray into the supermarket and department store industries, Chinese e-commerce operator Alibaba Group Holding is now aiming for dominance in another retail area: the country's rapidly growing convenience store market. What it appears to be after most is a treasure trove of detailed data on purchases that is not available from its online shoppers.
In March, Alibaba quietly opened a convenience store in a shopping center in Shanghai, China's biggest consumer hub. The store, called Yike EGO, is a guinea pig project as the company's first convenience store opened in partnership with major retailer Bailian Group.
With a floor space of about 500 sq. meters, the first Yike EGO is somewhat large for a convenience store. At first glance it is much like any other such store, selling items including food products, beverages and daily goods.
But there is also an array of products displaying a point-of-sale advertising message: "If you order it through an app, it will be delivered within 30 minutes."
In addition to introducing this delivery service, the Alibaba store also sells medical products -- something that is unusual at convenience stores in China.
Among the other features of the first Yike EGO are a huge open kitchen and eat-in space at the rear of the store. Employees wearing sanitary masks prepare fresh dishes such as sauteed vegetables.
A woman in her twenties eating at Yike EGO said: "Although I also often eat ordinary convenience store boxed lunches, freshly cooked foods are yummy after all."
On July 4, the second Yike EGO opened inside another commercial complex about 20 km away. The newer Alibaba store is smaller, but also has bread-making facilities.
One female customer said of the baked goods: "They are warm and look delicious. Goods (sold here) are more attractive than (those sold at other) convenience stores nearby."
Yike EGO said it planned to open its third store by the end of July.
According to people with knowledge of the situation, Alibaba plans to open a series of flagship stores with cooking facilities, before rolling out smaller stores in the surrounding areas, to which the flagship stores will supply freshly prepared foods and baked goods.
At the March session of the National People's Congress, China's legislature, Premier Li Keqiang made clear a government policy on promoting growth in the convenience store market. In China, the growth of any industry is dependent on government support.
While most retailers in China are suffering from the expansion of online shopping, the convenience store segment alone is continuing to grow, with customers being poached from other retail stores and restaurants.
The number of convenience stores topped 120,000 in China in 2018, with ample room for new outlets to open. The Chinese convenience store market has grown at an annual rate of about 20% in recent years.
One of the reasons for the rapid growth is that the operators of such stores have focused on boxed lunches and prepared foods, which have been popular with Chinese customers.
Three major Japanese convenience store chains expanding in China -- FamilyMart, Lawson and Seven-Eleven Japan -- have already established a competitive advantage in areas such as boxed lunches and prepared foods.
However, despite the burgeoning market, the first Alibaba convenience store seems unlikely to become profitable anytime soon.
Although it is still in the testing stage, it has a lot of staff, with at least 20 employees spotted there recently -- a high number, given that daily sales at ordinary convenience stores in China average at about 5,300 yuan (about $770).
The Chinese convenience store industry is also crowded with some 120,000 outlets, twice as many as in Japan, and more than 100 companies competing for business.
Alibaba has already invested over $9 billion in the retail industry. It entered this new area primarily to gather customer data, rather than to grow earnings. It has already collected a huge amount of data on purchases, as it boasts some 650 million users of its online shopping site and over $830 billion in annual gross merchandise value.
Data is also being fed in from Alipay, its e-payment service provider, and other companies under its umbrella. Why then does it want data specifically from convenience stores?
Consumers do not visit online shopping sites unless they can find products they want. As a result, online shopping sites need to offer a huge range of products sought by a wide variety of consumers. Online purchases tend to be made based on the weight and price of a product and are not necessarily the ones a consumer wants immediately.
Conversely, the average convenience store has a floor space of about 150 sq. meters and about 3,000 items for sale. With limited space, they have to sell goods that meet consumers' immediate preferences and they quickly replace unpopular products.
Many customers use the same convenience store twice or more a day.
At convenience stores, customers buy goods based on their immediate needs, and less on price. It is thought that the data on such purchases is far more likely to reflect customer demand and it therefore highly important for retailers.
Being able to use this data on instantaneous shopping habits to further stimulate demand thus represents something of a holy grail for operators in the segment.
As growth in the Chinese online shopping market has been stagnating in recent years, Alibaba is also facing the management challenge of transforming a business structure that has become dependent on online shopping.
Still, keeping pace with demand is not necessarily easy. Alibaba's fresh food-focused supermarket chain, Hema Xiansheng, had to close one of its stores recently after its staffing levels could not keep pace with its rapid expansion. And just recently in the first Yike EGO store, many of its prepared foods were out of stock.
Alibaba's whirlwind sweep across China has resulted in something of a halo effect, but the online retailing behemoth apparently has yet to find the secret of conquering the world of brick-and-mortar stores.