Alibaba's Starbucks Partnership Is Just The Start For Its Newly Acquired Delivery Network

Alibaba Group (NYSE:BABA) is already using the large delivery fleet it acquired when it took control of food delivery company Ele.me in May.

This article originally appeared in the Motley Fool.

The e-commerce giant announced in early August that it would use Ele.me's extensive delivery network to assist China's largest coffee provider, Starbucks (NASDAQ:SBUX), in a new delivery push. The American company claimed 80% of the China coffee market as of 2017, but this new delivery program should help it increase its market share further.

More importantly, the Starbucks initiative gives a taste of the other delivery partnerships that Alibaba might strike up with various companies now that it has an impressive last-mile delivery fleet.

Starbucks is the first to benefit from the Ele.me delivery fleet

This September, the delivery partnership between Starbucks and Alibaba will start with 150 of the Starbucks locations in Shanghai and Beijing. Eventually, the program will expand to 2,000 stores and 30 cities by the end of 2018. The program is necessarily ambitious considering Starbucks already has plans for 5,000 stores in China by 2021, having added 550 stores there in 2017 alone.

To make this new delivery system work, Alibaba designated specific Ele.me delivery riders to train for the job and designed special carriers for the food and drinks they'll be transporting. Alibaba hasn't yet provided a guaranteed delivery time for orders.

Alibaba is just getting started with Ele.me partnerships

This first partnership shows how Alibaba can use Ele.me to go after China's $10.7 billion food-delivery market. The options are almost limitless.

Ele.me's delivery fleet is especially valuable to Alibaba and other Chinese retailers because it specializes in last-mile delivery. Alibaba already has a local-services platform, Koubei, that stands to gain a horde of customers as the company's last-mile delivery range and penetration have expanded through the acquisition. Alibaba said the Koubei program is essential to its long-term growth because it will encourage local merchants and customers to sell and order online now that doing so is more convenient.

If the Starbucks partnership is a success, Alibaba can replicate it with other restaurants and grocery stores. The company has enough delivery employees to train select groups for specific product deliveries, from groceries, to coffee -- or even ice cream.

For example, Alibaba could use a group of Ele.me's employees to assist with deliveries from its own Hema supermarkets. At the moment, Alibaba offers 30-minute grocery delivery from Hema, but only within three kilometers of a store. Ele.me could conceivably expand that range.

Alibaba has shown how serious it is about its local delivery ambitions with its recent announcement that it would spend $1 billion each month from July to September to help promote Ele.me's services. The goal of the $3 billion summer campaign is to capture over 50% of the food delivery market in China.

Alibaba is using Ele.me to take on the full China delivery market

Ultimately, Ele.me's growth should help digitize more sales in China, leading to higher delivery rates. According to Alibaba, Ele.me isn't yet reaching its full potential in food delivery. Food delivery accounted for only 10% of the $585 billion Chinese food market in 2017, the China Cuisine Association reports. If Alibaba can execute on its Starbucks partnership, it will introduce more customers to delivery services in China, with positive implications for its larger food delivery ambitions.

During Alibaba's latest earnings call, executive vice chairman Joseph Tsai said that by digitizing the China retail industry, China's $5 trillion retail sales will one day be Alibaba's total addressable market, as opposed to just the online sales portion. This shows that Alibaba is thinking ahead to continue its impressive revenue growth over the long term -- good news for investors.

Natalie Walters has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.