By Cate Cadell
HANGZHOU, China (Reuters) - In a small village shop near the eastern Chinese city of Hangzhou, store owner Lu Qiwei uses his smartphone to place orders to refill stocks of instant noodles, rice and drinks.
Lu, 61, says he didn't own a phone two years ago, but he's now one of 600,000 people using a supply chain app made by e-commerce giant Alibaba Group Holding Ltd <BABA.N>, aimed at drawing millions of Chinese mom-and-pop stores into its orbit.
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The app is one part of a multi-billion dollar drive by Alibaba to extend its dominance of online shopping into physical stores, and build a data fingerprint for every consumer in China, where 85 percent of retail sales are still made offline.
"We're working to make the net in the sky and the net on the ground," CEO Daniel Zhang said last month after Alibaba took a $2.9 billion stake in top grocery chain Sun Art Retail Group Ltd <6808.HK>. "We will cover all consumers seamlessly."
Alibaba's strategy echoes Amazon Inc's <AMZN.O> $13.7 billion deal this year for organic offline grocer Whole Foods Market Inc - but with a twist.
China's fragmented market means Alibaba is spreading itself wider and thinner, hooking an array of mall operators and stores to its mobile payment, logistics and inventory management tools.
Alibaba said it had no immediate comment on how the two companies' strategies compare.
Over the past two years, Alibaba has acquired major stakes in big box retailer Suning Commerce Group Co Ltd <002024.SZ>, Lianhua Supermarket Holdings Co Ltd <0980.HK> and Intime Retail Group Co Ltd <INTIF.PK>.
It all adds up to a vital - but expensive - gamble as Alibaba looks to maintain rapid growth and meet huge investor expectations even as the broader online retail market slows. Alibaba shares have more than doubled this year.
"It definitely needs to be a priority for Alibaba," said Jason Ding, partner at Bain & Company's Beijing office, adding it would help the firm tap an older demographic that prefers to shop offline, and cut reliance on internet sales.
Alibaba's offline push gives it reach and influence over China's broader retail market. Its Tmall and Taobao stores have upended e-commerce in the market, and ties to many of the top bricks-and-mortar chains extend that influence offline.
The push would add at least thousands of supermarkets and malls, and potentially millions of small local stores. Amazon's Whole Foods Market has about 500 outlets in the United States and UK.
Despite overseeing a mass of offline sale points, analysts say Alibaba still has to piece them together - integrating data, managing personnel and protecting consumers' privacy.
"These are areas Alibaba doesn't necessarily have amazing expertise in, they just happen to have really good access to data and really good connections with brands," said Ben Cavender, Shanghai-based principal at China Market Research.
Getting shop owners on board takes resources and time.
Behind Alibaba's Ling Shou Tong supply chain app is an army of some 2,000 foot soldiers, who work purely on commission to convince store owners to use the app, the firm says.
The workers, called 'chengshi paidang' - or city partners - train at Alibaba and pay a 3,000 yuan ($454.47) deposit and a 3,000 yuan annual platform fee to act as salespeople in small cities, earning a commission on products sold via Alibaba apps.
And there are logistical hurdles, said Yu Wenze, 21, who worked as a city partner in a rural area of Shandong province.
"First, awareness of the technology is too low and the replacement cycle for goods is too long. Also, the logistics aren't good enough yet. We have to commit to next-day delivery if the shop ordered before 4.00 p.m., but in most cases we can't do it."
Alibaba's efforts are further complicated by questions over ownership of individuals' data, as it extends its offline network into highly varied offline environments.
"They need that personal information in order to create more targeted offline stores, and all of that will require additional data to be shared across different locations," said Bain's Ding.
"There are a lot of new rules that need to be defined if they want to strike the right balance."
Store owners were mixed about the impact on their business.
"They give us storefront decorations and come out to give in-store training and other help," said one store owner in eastern Hangzhou, who converted his shop to an official "Tmall Store". He didn't want his name used as he's not authorized by Alibaba to speak to the media.
The store is part of a drive launched in August to transform 10,000 convenience stores outside China's major cities into Tmall-branded stores within four months.
Near the shop's till, goods have digital price tags that change to match online prices. Outside, Alibaba's Tmall mascot – a black cat - looms over the shop front.
On the top floor of an Intime department store in downtown Hangzhou, Alibaba's IKEA-like "Tmall Home Selection" uses electronic tags that allow shoppers to browse sofa cushions and vases before paying online and getting goods delivered.
On a recent Friday afternoon, the store was quiet.
"People still buy in the store... but the concept is still very new," said a saleswoman who declined to be named. "It's empty because people are working right now, but they can always buy online."
Back in his store, Lu is quietly happy with his new system, which he says has cut his costs by knocking local re-sellers out of his supply chain. Customers can now also pay more easily on their smartphones with Alibaba-linked Alipay.
"Now we all work for Alibaba," he said.
(Reporting by Cate Cadell in BEIJING, with additional reporting by Sijia Jiang in HONG KONG; Editing by Adam Jourdan and Ian Geoghegan)