Alibaba’s grand strategy to feed China’s middle class

This article was co-authored by Lucía Wei He.

During last year’s record-breaking Singles Day online shopping extravaganza, there were some surprising top-selling products among the usual suspects of electronics, cosmetics and apparel: In the first hour of 11/11, T-Mall reported (Chinese link) that it had sold 13.6 million Ecuadorian shrimp, 140 thousand Mexican avocados, 920 thousand Southeast Asian lobsters and 1.4 million kilos of Australian beef. JD, meanwhile, boasted a 270% year-over-year increase (Chinese link) in online sales of fresh produce.

It’s no surprise that online retailers including Alibaba and JD have been fiercely battling each other over China’s fresh produce market. The explosive growth in online sales of the shengxian category (literally “raw fresh”) is one of the strongest manifestations of China’s so-called “consumption upgrade.” Driven by rising disposable income and all-too-frequent domestic food scares, such as the ongoing African Swine Fever epidemic, Chinese consumers are demanding healthier and safer food alternatives. Meanwhile, distrust in domestic producers and a tendency to favor foreign products has dramatically increased the amount of food sourced from overseas.

Increasing food imports and an escalating “fresh produce war”—which has already seen some early casualties—make access to high quality overseas suppliers a key competitive advantage. Although all online grocery players are in one way or another dabbling in direct sourcing, supplier partnerships or even vertically-integrated food production, none have a supply chain strategy that is as comprehensive or as ambitious as that of Alibaba.

Managing cross-border trade involving international merchants has always been a core focus for Alibaba, which is now building a global, data-enabled platform to seamlessly connect food producers with consumers across the world. Food imports have become central to the company’s aspirations to be the leading platform for global trade. Having started out by connecting Chinese factories with overseas customers, Alibaba is now shifting its focus to sourcing food from the rest of the world to feed China.

A grand import strategy

In November 2018, on the sidelines of the China International Import Expo in Shanghai, Alibaba CEO Daniel Zhang announced a plan to source $200 billion in overseas products over the next five years in response to Chinese consumers’ insatiable appetite for imported goods. The plan has since become known as Alibaba’s “grand import strategy” (Chinese link).

At the center of the strategy is Win-Chain, an Alibaba affiliate that is virtually unknown outside of China. At the end of 2018, Alibaba reorganized its online grocery businesses to make Win-Chain responsible for procurement across its entire fresh produce and food ecosystem, which includes Hema, T-Mall, RT-Mart and Eleme. The move was meant to leverage Win-Chain’s supply chain and data capabilities to make it a “global procurement hub,” which could eventually serve not only Alibaba but also third-party B2B customers.

Win-Chain is key to Alibaba’s vision to create a global food supply network. The company, whose English name appears to be a reference to building winning supply chains, originated as the procurement arm of Yiguo, one of China’s first online grocery platforms. Alibaba first invested in Yiguo in 2013, and again in 2018, leading a $300 million round that was said to be the largest-ever financing in the fresh produce sector.

At the CIIE, Win-Chain signed a historic $1.9 billion agreement to procure beef and pork from two international meat suppliers. Under the agreement, Brazil’s JBS Group and Danish Crown of Denmark will provide Win-Chain a guaranteed supply of beef and pork, while Alibaba will leverage its retail and logistics capabilities to market and distribute the products within China.

According to (Chinese link) founder and chairman Jin Guanglei, Win-Chain will implement a “40+50+100” plan over the next five years—signing supply agreements with 40 countries, 50 regions and 100 companies globally. In addition to deals with JBS and Danish Crown, Win-Chain has also signed agreements with Camposol, one of Peru’s largest producers of berries and avocados; Marine Harvest, Norway’s largest salmon producer; Thai Union, a Southeast Asian seafood supplier; and Cargill, an American multinational and chicken supplier (disclosure: one of the co-authors of this article is employed by Cargill).

Building a connected end-to-end supply chain

The “grand import strategy” championed by Win-Chain is a key component of Alibaba’s global aspirations, so much so that Alibaba founder Jack Ma has personally pushed the initiative, using his celebrity status to serve as an ambassador of sorts to foreign governments.

In May 2017 Ma traveled to Argentina, where he met President Mauricio Macri and signed a Memorandum of Understanding to promote the country’s wine and food exports through e-commerce. Shortly after, Ma traveled to Mexico and signed another agreement with President Enrique Peña Nieto. In addition to Argentina and Mexico, Alibaba has been actively cultivating other key food producing countries including Chile (fruits), Australia (beef) and New Zealand (seafood).

Alibaba’s appeal to producers is twofold. Suppliers can leverage Alibaba’s e-commerce platforms, sales and marketing capabilities, and physical logistics network to access the Chinese consumer market and increase their sales. Second, and perhaps more important, is that food suppliers that plug into Alibaba’s integrated supply chain can have direct access to valuable consumer data, which they can use to better understand customer demand and optimize operations. Alibaba has dubbed this the C2B business model, which until now had not been adopted in the fresh food industry due to the extremely fragmented nature of global food supply chains.

Long shadow

New contenders are still entering China’s online grocery fray, such as Tencent-backed Meituan, which in January launched its own fresh produce delivery service. To prevail in an increasingly crowded field, in which discounts, subsidies and “blitzscaling” have become the norm, Alibaba is focused on building a superior global supply chain.

Regardless of the outcome of China’s “fresh produce wars,” the ongoing race to source fresh food will shake food markets around the world. China currently feeds 20% of the world’s population with only 7% of its farmlands, and dwindling domestic resources means that becoming more efficient or importing more food are the only viable alternatives to avert a food crisis. The world should be prepared for China’s disproportionate share of global agricultural trade—representing, for example, two-thirds of the world’s soybean market—to increase even further.