$BABA

Alibaba’s latest earnings suggest it can handle the pricey push into groceries and supermarkets

On Thursday, November 2nd, Alibaba announced its earnings for the quarter ending September 30. The company reported revenues of $8.29 billion, marking a 61% increase from the same period one year ago. Net profits also soared, reaching $2.62 billion, up 93% from one year prior.

The earnings mark a minor turning point for Alibaba, as it’s the last time it is not including its loss-making logistics division, Cainiao, in its top-line report of revenue and profit.

This quarter is the second quarter of the company’s 2018 fiscal year.

In May 2016, Alibaba disclosed it was facing an SEC probe into how it disclosed Cainiao’s financials. Last month the company increased its stake in Cainiao from 47% to 51%, leaving the remainder to the Chinese logistics providers that have jointly invested in it. Alibaba has stated that its ownership increase in Cainiao was not spurred by the probe.

Next quarter, the unit’s financials will be placed in Alibaba’s “Core Commerce” segment, which includes money made primarily by selling ads and other services to vendors on its Taobao and Tmall e-commerce marketplaces.

Still, the consolidation will unlikely make a large dent in its bottom line. Even though Cainiao operates in the red—this quarter Alibaba’s share of the unit recorded a $45 million loss—Alibaba’s profits will more than compensate. That should please investors, as the company will spend heavily on logistics as it expands into new types of retail. Last month, upon announcing its increased ownership stake in the division, the company stated it would invest an additional $15 billion in logistics over the next five years.

 

Much like Amazon, Alibaba is venturing out into selling groceries online. In 2015, well before Amazon got serious about becoming an online supermarket, Alibaba began offering fresh produce and meats for sale on its Taobao and Tmall marketplace sites.

Online grocery delivery is an expensive, low-margin business—a report from Sanford C. Bernstein says that groceries tend to be 50 to 100 times bulkier than goods with the same sticker price, and therefore more costly to transport. But Alibaba and other retailers are investing in grocery delivery because the category spurs repeat purchases. Since 2015, through Cainiao, Alibaba has open cold-storage distribution centers across China that store perishable groceries from third-party vendors selling on its e-commerce sites.

Meanwhile, Alibaba is also moving into in offline retail across China. The company has steadily invested in brick-and-mortar chain stores, like electronics vendor Suning and department store InTime. More notably, it has opened a handful of supermarkets in major Chinese cities that it owns and operates completely.

Known as Hema, the stores let consumers living within a three kilometers radius purchase groceries displayed in the store via Hema’s app, and then receive them via delivery within thirty minutes. Fifty percent of store purchases are reportedly completed this way. Food in these stores marks a whole new set of inventory that Alibaba must help manage through Cainiao.

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