ALIBABA Group Holding Ltd. is considering raising funds for its high-tech grocery chain at a proposed valuation of US$10 billion, according to people familiar with the matter.

Freshippo, known as Hema in Chinese, is working with an adviser on an exclusive list of potential strategic and financial investors that will be invited to join the funding round, which is likely to kick off next month, the people said.

The separate fundraising raises the prospect that Alibaba may consider spinning off the chain as a separate business, unlocking some of the value in a brand that once formed the centerpiece of its burgeoning physical retail operation.

Alibaba has yet to decide on the size of Freshippo’s planned fundraising, though China’s e-commerce leader will retain a major stake in its new retail arm after the funding round, the people said.

Deliberations are ongoing and there’s no certainty they will lead to any transaction, they added. The US$10 billion value is preliminary and could change as talks progress. Alibaba declined to comment.

The round is one of the first equity raises by Alibaba’s units since regulators slapped the giant with a record US$2.8 billion antitrust fine and ordered it in April to revamp the way it conducts its business. The internet behemoth has been stepping up investments to develop growth drivers, after heightened government scrutiny and intensifying competition from the likes of Pinduoduo Inc. and JD.com Inc. prompted it to slash 2022 revenue forecasts.

Freshippo started off as an independent project born within Alibaba back in 2019 that combined a grocery store, restaurant and delivery app, using robotics and facial recognition to speed up logistics and payment. At the time, the company set itself a target of opening a Hema branch in every Chinese city with more than 1 million residents, according to Caixin.

Now with nearly 300 stores in China, the fresh produce chain is planning to roll out construction on a network of country-wide distribution centers, with its first hub in Wuhan, central China.

Freshippo plans to roll out similar centers across China over the next few years, including in Chengdu, Shanghai, Hangzhou, Guangzhou and Xi’an. This upgraded network would help the supermarket ensure the safe and speedy handling of fresh produce as they’re transported across the country, such as crabs from China’s east coast and lychee fruit from the tropical island province of Hainan.

Online groceries is one of the fastest-growing segments in China’s e-commerce industry, drawing participation from the likes of Pinduoduo, food delivery leader Meituan and ridehailing firm Didi Global Inc., as well as a plethora of smaller upstarts.

To expand its share of the market, Alibaba has been experimenting with different formats, including Freshippo’s digitally supported outlets, Taoxianda’s online supermarkets as well as community e-commerce, where shoppers pool their orders to take advantage of discounts. In 2020, the company also invested US$3.6 billion to double its stake in Sun Art Retail Group Ltd., China’s largest hypermart chain.

The businesses are part of what Alibaba CEO Daniel Zhang calls his “new retail” strategy, where online and offline retail experiences are seamlessly integrated, to diversify beyond the company’s flagship platforms Taobao and Tmall.

Freshippo CEO Hou Yi said the company sources and selects products for consumers based on their preferences. (SD-Agencies)