Walmart shifts gears in China, takes stake in e-commerce Alibaba rival

Profile picture for user ddpreez By Derek du Preez June 20, 2016
Summary:
US retail giant Walmart has struggled to find success in China to date and is now swapping it’s Yihaodian marketplace for a 5% stake in JD.com.

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China’s retail market is notoriously competitive and has proven to be a difficult nut to crack for Western companies, which recognise the growth potential but have largely failed to make any significant inroads.

Walmart is no different. Despite having over 400 stores in the region and having operated in China for a number of years, it has struggled to achieve the same level of growth and rapid expansion it has experienced on its home soil.

The result has been the closing down of some of its physical outlets and soft online sales. This is despite it taking full control of online marketplace Yihaodian in July last year, which was intended to spur its multi-channel strategy in the region.

In particular, companies such as Walmart have failed to take on the e-commerce behemoth that is Alibaba, which dominates online purchases in China and recently stated that it expects a 48% rise in sales for the year ending March 2017.

Alibaba is going from strength to strength by not only tackling more rural regions in China, which may prove difficult for online competitors, but by also diversifying its portfolio and investing in international companies, media products and cloud computing.

Not only is the competitive landscape tough, but China’s economy has faced a challenging year and has proven to be less stable and resilient than previously thought.

However, Walmart has seemingly reassessed its strategy in China and has decided to take a stake in Alibaba’s closest rival - JD.com - by trading in its ownership of Yihaodian for a small shareholding in the online retail.

This should allow Walmart to compete closer to the action, effectively giving it a seat at the table with the no.2 online retailer in the region, and allows it access to JD.com’s growing multi-channel network.

The deal

Walmart has described JD.com as China’s largest e-commerce company by revenue and has said that the ‘strategic alliance’ will help better serve consumers across China “through a powerful combination of e-commerce and retail”.

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The deal covers a wide range of business initiatives, covering both online and offline retail, according to the announcement.

The press release states:

For Walmart, the alliance greatly expands its opportunity in China e-commerce and provides its stores and Sam’s Clubs with potential traffic from JD.com’s significant base of online customers and vast same-day delivery network to serve its customers.

JD.com will leverage Yihaodian’s strong brand and business in eastern and southern China and in key product categories such as high-quality grocery and household goods, both of which complement its own geographical and product strengths.

In addition, JD.com’s customers will gain access to a wide range of new and imported items from Walmart and Sam’s Club.

As part of the agreement, Walmart will receive 144,952,250 newly issued JD.com Class A ordinary shares, which amounts to approximately 5% of total shares outstanding (worth an estimated $1.5 billion).

The deal sees JD.com take advantage of Yihaodian’s marketplace brand, as well as the success of Walmart’s Sam’s Club stores, whilst Walmart gets to take advantage of JD.com’s access to online consumers.

Doug McMillon, president and CEO of Walmart, said:

We’re excited about teaming up with such a strong leader in JD.com, and the potential that this new relationship creates for customers in China, as well as for our businesses. We thank the Yihaodian associates for creating a strong brand and business that has helped lead to this opportunity with JD.com.

JD.com shares similar values in making the lives of customers better. It also has a very complementary business and is an ideal partner that will help us offer compelling new experiences that can reach significantly more customers. We also look forward to offering customers a tremendous number of quality imported products not previously widely available in China through Walmart and Sam’s Club.

The deal highlights include:

  • JD.com taking ownership of the Yhiaodian marketplace platform assets, including the Yihaodian brand, website and app. However, Walmart will continue to operate the Yihaodian direct sales business and will be a seller on the Yihaodian marketplace. The companies said that they would work together on growing the Yihaodian brand and business under its current name and market position
  • Sam’s Club China, which has seen success for China in the region, will open a flagship store on JD.com, which it hopes will expand the availability of Sam Club’s products across China. It said that it will offer same and next day delivery through JD.com’s nationwide warehousing and delivery network, which covers a population of 600 million.
  • The companies expect that they will work together to increase product availability across both their supply chains in China.
  • Walmart’s China stores will be listed as a preferred retailer on JD.com’s O2O JV Dada, a crowd sourced delivery platform, which it hopes will drive online traffic to Walmart stores. This would allow customers to order fresh food and other items from Walmart stores for 2-hour home delivery.

Richard Liu, CEO of JD.com, said:

We are very happy to announce this landmark agreement between two leading retailers, which we are confident will help bring e-commerce in China to the next level and benefit millions of consumers.

Walmart is synonymous with trusted-quality efficient retailing, and we believe that this tie up will increase both product selection and overall user experience. We look forward to further developing Yihaodian, which has tremendous strength in important regions of eastern and southern China.

Yihaodian will continue offering the outstanding user experience its customers have come to

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expect, which we will further augment by leveraging our unparalleled logistics capabilities and breadth of product categories.

My take

As I noted above, China’s retail market - both online and offline - is extremely competitive and has proven to be an elusive beast for most Western retailers.

However, by Walmart exposing its brand to China’s second largest online retail platform is in theory a pretty low-risk move that could provide it with the reach it needs. Will it be able to beat Alibaba? I doubt it. But it will likely put it in a better position than trying to compete on its own.

Image credit - Images sourced via Walmart

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