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The Kroger-Alibaba Deal: Is It a Fit?

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Alibaba’s deal with Kroger

Alibaba (BABA) has struck a deal to sell a popular line of Kroger’s (KR) grocery products in China. Under the deal, Kroger will sell its Simple Truth brand to Chinese consumers on Alibaba’s Tmall marketplace. Simple Truth is a line of natural and organic grocery items that generated $2 billion in sales last year. Alibaba reaches ~576 million consumers across China.

There is a strong demand for high-quality, organic food in China, and Alibaba hopes to meet that demand through its partnership with Kroger.

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Countering the Walmart-Tencent-JD.com alliance

The deal with Kroger highlights Alibaba’s belief that there is an opportunity to drive growth domestically by tapping into retail areas with a strong demand. The Alibaba-Kroger deal could help Alibaba counter the Walmart-Tencent-JD.com alliance that is actively working to narrow the competition.

Walmart (WMT) and Tencent (TCEHY) own stakes in JD.com (JD), and the three are partnering in many areas. For example, Walmart sells some items through JD.com’s online platform. In March, Walmart decided to drop Alibaba’s Alipay mobile payment service in its stores in the western part of China and went with Tencent’s WeChat Pay, dealing a blow to Alibaba.

e-Commerce contributes 85% of Alibaba’s revenue

Alibaba’s total revenue increased 61% YoY (year-over-year) to $12.2 billion in the June quarter. Revenue rose 31.2% year-over-year for JD.com and 39.3% YoY for Amazon (AMZN). e-Commerce accounts for ~85% of Alibaba’s total revenue.

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