Apr 01, 2014 05:48 PM

Closer Look: Alibaba, Traditional Retailer Agree to Try to Build New Sales Model

(Beijing) – Alibaba Group said on March 31 that it will invest HK$ 5.37 billion in Hong Kong-listed Intime Retail (Group) Co. Ltd., giving it a stake of 9.9 percent. The deal could eventually give the country's largest e-commerce company at least 25 percent of Intime's shares over next three years.

The firms will establish a joint-stock company that shares information about frequent customers and use a common payment service and inventory management system for Alibaba's shopping sites and Intime's brick-and-mortar stores.

Intime says it runs 28 department stores and eight shopping malls, and has more than 1.5 million frequent customers. But the rise of online shopping in recent years has seen the retailer lose customers to shopping sites such as Alibaba's Taobao and Tmall. Retailers find themselves taking on the role of "fitting rooms," where customers try on what they want but then buy it online later.

"Customers are changing and we have to keep up," Intime CEO Chen Xiaodong said. "We must embrace e-commerce."

During a major sales day in November Intime invited customers to come to its stores to check out a select range of goods it had put on Tmall. Customers could add the products to their Tmall virtual shopping carts by scanning quick response (QR) codes – those black and white blotches that can be scanned with a phone's camera. The collaboration helped Intime add about 500,000 frequent customers in two days, a source from Alibaba said.

Now, the retailer group plans to take the collaboration even further by putting its entire inventory online and linking its frequent customer information with Alibaba's user account system.

Chen envisions the online inventory system this way: besides pricing information, the database will also show an updated inventory and track the physical locations of products, which would make both logistics and sales more efficient.

For example, if one store does not have the size a customer wants, a salesperson can go into the database, find the warehouse closest to the customer's home with that product and ship it from there. This would be much more efficient than asking another store to send the product to the store for the customer to pick up later. Also, if Intime has the online shopping records of its frequent customers, it can use that data to target promotions and discounts to the likes of the customers.

Alibaba has a even bigger plan in mind. It wants to make the collaboration model with Intime a template for other retailers who want to build a closer connection with the Internet, the company said.

"Alibaba wants to provide a comprehensive solution for the commodity retailing industry on its platform, which will become the future standard of the retail industry," Alibaba COO Zhang Yong said.

But before all this happens, Alibaba and Intime need to find a way to redistribute profits among retailers, brand owners and franchisers under the new operation model.

Both Alibaba and Intime admit that putting retail product information online is tricky. In China, the retail industry has a unique operating model where retailers lease storefronts to franchisers, who orders goods from brand owners. As a result, retailers do not have data on information such as product quantities, types and locations. Brand owners take regular orders from franchisers and therefore do not know which goods are selling the best at the stores. The franchisers only have inventory information of the warehouses close to them.

Information asymmetry at all these levels makes creating a complete online inventory system difficult for Intime and Alibaba. The two companies said they have built an inventory database of 1,000 products. But it is still rudimentary, Intime said.

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