Alibaba Group Holding Ltd. expects pure e-commerce operators to face ‘tremendous challenges’ as the web giant seeks to tap more growth from transforming China’s $4.5 trillion traditional retail industry.

China’s largest e-commerce company plans to upgrade retail businesses and improve efficiency across product manufacturing, distribution and service, Chief Executive Officer Daniel Zhang said in an e-mailed letter to shareholders on Thursday. The company is working with partly-owned Suning Commerce Group Co. and Intime Retail Group Co. to integrate the online experience with brick-and-mortar shopping.

Alibaba has highlighted trillions of dollars in Chinese household savings as a key driver of growth, with the company pledging to keep investing in business and geographical expansion, even if it drags on earnings in the short-term. The company is also looking overseas for growth, as Chairman Jack Ma targets serving 2 billion consumers and supporting 10 million profitable business around the world in 20 years.

“The most important opportunity on the horizon is not growing online sales in isolation but rather helping traditional retailers upgrade into a brand new retail model,” Zhang wrote. “The consumer retail industry as a whole is experiencing a radical disruption driven by digital transformation.”

While Alibaba has grown to dominate e-commerce in China by appealing to younger users, 75 percent of them 35 or younger, it’s coming up against a tough macro-economic environment. The economy is deteriorating, particularly in the rust-belt northeast, hurting the consumer demand that its online stores rely on.

The Hangzhou-based company is moving into untapped rural regions, exploring markets abroad and investing in online media and cloud computing to tap new sources of revenue. The company, which is trying to counter the impact of a slowing Chinese economy, bought Youku Tudou Inc. to expand into online video and Lazada Group SA to gain a foothold in Southeast Asia.

Zhang highlighted cloud computing, digital marketing and cross-platform entertainment as other key areas of long-term growth. The company has positioned cloud computing as one of its fastest-growing businesses, hosting 35 percent of websites in China, while eyeing the top spot in Japan within two years. It’s also beefing up its presence in the Middle East and U.S.

“Cloud computing and big data will become ubiquitous,” Zhang wrote. “Data has already become the new ‘natural resource’ that is as vital as oil and electricity. Cloud computing is the new ‘engine’ powering commercial operations.


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