Alibaba announced a $3.6 bn investment in Sun Art Retail Group, China's largest supermarket chain store, last week. The investment further increased Alibaba's holding in Sun Art Retail Group to 72%, making it the controlling party after its initial investment in 2017.

Investing in and digitalizing the traditional offline retailer has been at the center of Alibaba's New Retail Strategy introduced in 2016. The idea is to build Alibaba's offline retail reach and further accelerate the top-line growth as the online traffic would inevitably slow down. At that time, the industry saw the competition in eCommerce stable, and the next big opportunity is the integration of online and offline retail.

The rise of PDD has unexpectedly changed the competitive landscape in eCommerce, and Alibaba has to fence off the competition. As a result, the offline expansion has been off the buzz in the past two years. But these offline investments are still crucial to Alibaba, especially given the rising importance of local services.

Meituan has been winning in the local services with its dominant position in food delivery. Alibaba is fighting with Meituan's food delivery with its Ele.me business, but the effort is coming up short so far. However, marching into the other local services areas, such as fresh groceries and local merchandise, could create a new space for Alibaba to compete with Meituan.

Food delivery is the largest segment of local services, but local fresh groceries and merchandise are the fastest growing areas. Food delivery's share in the total local services market has shrunk from 80% to 70% from 2018 to 2019, as more delivery orders were for fresh groceries and local merchandise.

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Despite losing to Meituan in food delivery, Alibaba is still the only company with a full range of local services operations. It has Ele.me for food delivery and added the local merchandise delivery recently. Ele.me, Freshippo, and invested start-ups can also do fresh grocery delivery. The series of investments in traditional retailers like Sun Art give Alibaba an unmatchable offline network infrastructure and a vast number of SKUs to serve customers. In comparison, Meituan only has a food delivery business and just started fresh groceries and local merchandise delivery. JD only has local merchandise and has no food and fresh grocery delivery.

Thus, by investing in Sun Art and raising the bets on fresh groceries and local merchandise delivery, Alibaba might get a chance to catch up with Meituan in the broader local service market. The benefits of growing fresh groceries and local merchandise are multi-fold:

• It increases the non-food delivery order volume between the lunch and dinner hours and better utilizes the delivery force, lowering the per-order delivery cost.

• It attracts more customers into its ecosystem by offering a full range of services, reducing customer acquisition costs.

• It expands its payment and advertising solutions into an untapped base of small local retailers and creates more monetization opportunities.  

The competition in fresh groceries and local merchandise delivery is still at the early stage, and it is too early to tell who might win. However, the investment in offline retailers has given Alibaba a great advantage to succeed in the new battlefield of local services.