Lazada Group, founded by Germany's Rocket Internet in 2012, is headquartered in Singapore and also operates in Malaysia, Indonesia, the Philippines, Thailand and Vietnam - providing an opportunity for Alibaba to tap what it sees as Southeast Asia's tremendous growth potential.
But the market is also quite challenging and highly fragmented, with only 3 percent of the region's total retail sales currently conducted online.
Under the deal - Alibaba's biggest overseas investment so far according to Thomson Reuters data - the Chinese firm will buy about $500 million (roughly Rs. 3,324 crores) of newly issued Lazada shares and the rest will be bought from current shareholders.
These include Britain's biggest supermarket operator Tesco Plc, which said it would sell an 8.6 percent stake for $129 million (roughly Rs. 857 crores), valuing Lazada at $1.5 billion (roughly Rs. 9,973 crores). Rocket and Investment AB Kinnevik will also sell shares.
Alibaba and Lazada did not specify the size of the stake purchased but the sales imply a two-thirds holding.
The e-commerce market for business-to-consumer sales across all of Indonesia, the Philippines, Singapore, Malaysia, Vietnam and Thailand was just $10.5 billion (roughly Rs. 69,813 crores) in 2015, or 1.5 percent of retail volume, according to consultancy firm Frost & Sullivan.
By comparison, it accounts for 12 percent of retail in China, and 8 percent in the United States.
And in countries like Indonesia, e-commerce firms face logistical challenges, having to deliver purchases to dozens of islands via creaky ports and potholed roads.
In India, Alibaba and its online finance affiliate Ant Financial Services Group invested in Paytm, the country's largest mobile payment and commerce platform, and parent One97 Communications.
© Thomson Reuters 2016