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What Alibaba Can Do With Ele.me

Natalie Walters, The Motley Fool

Alibaba (NYSE: BABA) took time during its latest earnings call to get investors excited about its recent decision to fully acquire online food-delivery company Ele.me. The deal gave Ele.me an enterprise value of $9.5 billion. The purchase, however, could be well worth it when you consider that China's food-delivery market reached $10.7 billion in the 2017 fourth quarter, up 16.2% from the previous quarter, according to Analysys.

While Ele.me is already the market leader in China, its growth could get a huge boost from Alibaba's large base of e-commerce customers. At the same time, Alibaba can use Ele.me to bolster its ambitious New Retail projects and help with overall customer stickiness.

Ele.me employee rides a scooter while delivering food

Ele.me is helping Alibaba capture part of the food-delivery pie in China. Image source: Alibaba.

Ele.me can help advance Alibaba's New Retail projects

During its latest earnings call in early May, Alibaba provided some color behind its plans for Ele.me. Alibaba executive vice chairman Joe Tsai said Ele.me's well-established local fulfillment and delivery network could help Alibaba with its growing list of New Retail projects. "New Retail" is Alibaba's term for updated physical stores that combine the best of offline and online shopping.

Stores that have undergone the New Retail makeover in China allow customers to scan items for information, pay using facial recognition, order items and have them sent directly to their homes. While these projects require heavy investments in technology, they've already started to pay off for Alibaba.

One of Alibaba's most ambitious New Retail projects has been fresh-food grocer Hema. This past quarter, Alibaba added 13 new Hema stores, for a total of 37 locations. Part of Hema's mission is offering 30-minute grocery delivery to customers living within a 3 kilometer radius of a Hema store. This is where Ele.me comes in handy.

Ele.me's Feng Niao Delivery network has 3 million employees and owns a fleet of motorbikes. On the earnings call, Tsai said this delivery system can strengthen Alibaba's last-mile delivery network range and penetration. In more specific terms, Ele.me could help the growing number of Hema stores deliver groceries in under 30 minutes to more people and to further locations.

But Ele.me isn't just good for food and grocery deliveries. Its delivery network could also help fulfill orders for Alibaba's local commerce platform, Koubei. And Alibaba's largest e-commerce platform Tmall could use Ele.me's delivery system to speed up its last mile delivery efficiency on a range of orders from clothing to electronics. 

This works into Alibaba's long-term plan to rely less on third-party delivery services. In fact, last September, Alibaba took a controlling stake in its delivery business Cainiao. At the same time, Alibaba pledged to spend $15 billion on its own global logistical capabilities over the next five years. These three investments -- Ele.me, Cainiao, and the $15 billion -- are part of Alibaba's plan to deliver all orders in China within 24 hours.

Alibaba is clearly prioritizing its delivery network -- and it's not wrong to do so. The winners in the e-commerce retail market will be those that impress customers by delivering orders as fast as possible.

Ele.me can boost Alibaba's customer stickiness

If you look at the bigger picture, Ele.me is going to help Alibaba increase its overall customer loyalty. That's because Alibaba's over 550 million annual active customers are going to be getting their orders delivered faster and may soon be able to order food from Ele.me and a computer from Tmall on the same app. These added benefits are going to help Alibaba gain new customers and keep its old customers.

Focusing on customer stickiness is especially important for Alibaba because, although its the top online retailer in China, it's facing stiff competition from JD.com (NASDAQ: JD) and Tencent (NASDAQOTH: TCEHY). Although JD is considerably smaller than Alibaba, it has its own delivery network and also is building high-tech supermarkets across China. And although Alibaba is beating Tencent at the e-commerce game, Tencent is crushing Alibaba at the social-media game. Tencent's WeChat app hit over 1 billion monthly active users earlier this year.

It was important for Alibaba to touch on these benefits of Ele.me during its earnings call because the company needs investors to believe that this deal that valued Ele.me at $9.5 billion will be worth it. It needs investors to believe that it was a mutually beneficial match made in heaven, or investors would start to worry about the heavy investing the company is doing at the slight expense of its profit. Of course, if these comments about Ele.me didn't calm investors, then Alibaba's guidance for 60% revenue growth for fiscal 2019 should have done the job.

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Natalie Walters has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends JD.com and Tencent Holdings. The Motley Fool has a disclosure policy.