Tesco plc, Alibaba Group Holding Ltd And The Future Of Retail

What Alibaba Group Holding Ltd (NYSE: BABA)’s Fortunes Say About Tesco plc (LON: TSCO) And Its Strategy For Growth

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In the 1990s, people said that the internet would change everything. And one of the biggest online opportunities would be B2B (business to business). Companies would sell to each other via the web, cutting out the middleman.

I thought it was a great concept at the time, but perhaps it was a little overhyped. What seemed like a brilliant, multi-billion dollar idea was quietly forgotten about as share prices crashed, and the Credit Crunch laid the global economy low.

Alibaba is the leading B2B platform in the world

Today, Alibaba Holding (NYSE: BABA.US) is the leading B2B platform in the world. It has a market capitalisation of $193 billion. In 2015 it made a net profit of $24.2 billion — more even than Walmart. This is now the profitable retailer in the world. And, not surprisingly, it’s Chinese.

Everyone knows now that China is the workshop of the world. And just about any product that shops around the world sell is sourced from China. And Alibaba is the company that brings these manufacturers, and these shops, together. So it’s no surprise it makes quite a lot of money.

What’s more, Alibaba owns Taobao, which is the Chinese equivalent of Amazon and eBay. And Alipay, the firm’s online payments system, now accounts for half of all online transactions within China.

And it has companies like Tesco and Amazon in its sights

Contrast this with Tesco (LSE: TSCO). This is still, by far, Britain’s leading supermarket. It also sells more items online than any other business in Britain. I shop at Tesco every week, and I think it is still Britain’s best retailer. Yet, the problem is, it is making much less money than it used to. In 2016, analysts predict that this firm will make just 4.78p profit per share, putting in on a P/E ratio of 35.75.

Tesco is no longer the screaming buy it once was, and for many reasons. The supermarket sector in the UK is now overcrowded. In this low-cost, deflationary world, it is companies like Aldi, Lidl and B&M which are growing.

The pace at which the world is changing is a little frightening. Clearly, the centre of gravity of the world is moving inexorably east. If Tesco is to have a better future, it must move with it. That’s why I was a little surprised that it has sold many of its operations in countries such as Thailand and South Korea. To remain one of the world’s leading retailers, it needs a foothold in emerging markets, following the example of businesses such as Unilever and GlaxoSmithKline.

And investors interested in this sector should also look east. Currently Amazon.com has the highest market capitalisation of any retailer. But, even now, it makes far less money than Alibaba.

I think it is only a matter of time before the market capitalisation of Alibaba overtakes Amazon. Investing, by its nature, is about looking to the future, not to the past. If you are thinking of dipping your toe into Far Eastern stocks, I would make Alibaba one of your picks. Because if any company can be called the future of retail, it is Alibaba.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK owns shares in eBay and Unilever, and has recommended GSK. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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