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Alibaba: Unilever Partnership A Key Positive

  • BABA's partnership with UL once again underscores that BABA is the preferred ecommerce partner for MNCs.
  • UL can leverage BABA's distribution, logistics and analytics to drive further growth in China.
  • I remain bullish on BABA.

Alibaba (NYSE:BABA) and Unilever (NYSE:UL) formed a partnership last week that could allow UL to expand its presence in China by expanding its distribution channels, particularly in rural China. In addition, UL will use BABA's marketing unit, Alimama, and its cloud business, Aliyun, to improve its digital advertising strategy to achieve the highest ROI and brand awareness.

Although no financial details were given, I believe that it is significant to BABA and UL in several ways: 1) if this partnership proves to be successful, this reinforces BABA's position as the preferred gateway for foreign companies to sell their goods in China without a high capex commitment of building out offline distribution and retail channels; 2) UL currently sells 20 of its more than 400 brands in China, which is underwhelming considering that it entered China almost thirty years ago. With BABA as a strategic partner, UL could significantly increase the number of brands in the country and reach out to a greater number of consumers; 3) with more foreign brands in China, pricing will likely to come down for the consumers, resulting in greater competition for the local Chinese brands. I remain bullish on BABA.

Catering to the masses

UL's choice of picking BABA for its strategic partnership is a no brainer in that BABA has the scale, the distribution and the user traffic for UL to cater to a broader audience. Recall that my thesis on BABA is based on three pillars: First, I believe BABA will continue to be the dominant player in China's ecommerce market and the industry growth provides the company with a favorable backdrop. Second, BABA stands to be a key beneficiary of the cross-border ecommerce trend in the medium-term given its scale and global reach. Lastly, the integration of the Aliyun ecosystem will likely drive BABA's long-term growth in online-to-offline and mobile commerce.

UL's partnership fits in the second pillar in that it highlights BABA's strategic importance for foreign companies that are looking to reach the Chinese consumers. Currently, there are dozens of companies opening store fronts on TMall and some, such as Costco (NASDAQ:COST), are making TMall their initial entry vehicle into China. This is significant in that foreign companies can gauge consumer demand without committing to any offline capex. In the case of UL, the company opened an online store on TMall about five years ago and clearly the platform is gaining traction, which allows UL to have enough confidence to broaden the scope of its business with rural China being a focal point.

Besides expanding UL's distribution capability, a key component of this partnership is leveraging BABA's analytics to identify O2O opportunities for UL. In my view, BABA has all the assets for O2O expansion such as mobile payment, map content/services and mobile ecommerce. UL can leverage BABA's O2O assets to notify shoppers using location-based advertising and drive mobile or in-store transactions.

As for UL, the company currently sells 20 brands out of its total portfolio of 400 brands. Investors can expect UL to greatly expand its brand presence in China by leveraging BABA. This will bring more options to the Chinese consumers and as the price differential narrows between UL products and that of local Chinese brands, consumers would lean more towards foreign brands given the better quality perception. This could reverse the weak China sales numbers that UL is experiencing now.

In conclusion, I remain bullish on BABA. As more multi-national brands endorse BABA's ecommerce platform, I believe this will result in greater critical mass for the ecommerce giant and will be a negative to its competitors such as Wal-Mart (NYSE:WMT) and (NASDAQ:JD).