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Walmart buys lossmaking Chinese online retailer

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“When all else fails, put on a costume and sing a silly song,” was the management advice from Sam Walton, founder of Walmart. But it’s unlikely that Walmart’s incoming China chief will spend his first days at headquarters in fancy dress. More likely Greg Foran will have another Waltonism ringing in his ears: “High expectations are the key to everything.”

Three weeks ago the world’s largest retailer named Foran to head its China operations. His predecessor Ed Chan stepped down in October last year, the fourth senior-level departure from the retailer’s China business in six months.

Foran, the ex-head of supermarket chain Woolworths in Australia, is faced with a rapidly evolving retail landscape. Last week Walmart announced that it has taken a 51% stake in Yihaodian, a leading e-commerce site, in a move designed to boost its online presence in the country.

Walmart already held a minority stake in the online retailer but did not disclose the financial details for upping its investment. The move, which still requires regulatory approval, means that it replaces Ping An Group, which previously owned 60% of the e-commerce site, as the largest shareholder in the company.

Launched in 2008, Yihaodian offers more than 180,000 products ranging from groceries to consumer electronics, with 5,400 employees across logistics operations in Shanghai, Beijing, Guangzhou, Wuhan and Chengdu, as well as delivery stations in 34 cities China.

Sales have been growing quickly, reaching Rmb2.7billion ($429 million) in 2011, compared with Rmb805 million the year before. The site treads on the commercial toes of market leader 360Buy (in which Walmart also has a small stake) and Tmall.

“Since Yihaodian already has its own logistics and is very popular in Beijing and Shanghai, the deal is very positive for Walmart,” Yuji Fung, an analyst from Oriental Patron Financial Group, told Reuters.

Despite growing turnover, Yihaodian is some distance from profitability, however. Yu Gang, chairman and co-founder of Yihaodian, told the 21CN Business Herald that the company still needs substantial investment to increase its scale. To win new business it plans price discount campaigns and sustained spending on advertising – all of which requires cash.

Yihaodian says that investors will have to wait before seeing a return on their money. “Even Amazon.com spent seven years before making a profit; the turning point for becoming profitable is related to strategy,” Yu warns. “Yihaodian is expected to become profitable after its sales reach Rmb6 billion over the next two to three years,” he added.

Ping An Group’s exit from its Yihaodian investment could also have an impact. Ping An, which owns one of the country’s largest insurers, has been a crucial sales partner, supporting as much as 60% of the site’s business, reports CBN Weekly, mostly by offering gift vouchers on the site as rebates to millions of its insurance clients. Ping An continues to hold a stake in Yihaodian, albeit smaller, which may give Walmart confidence the insurer will continue to support such sales efforts through Yihaodian rather than rival sites.

For Walmart, the development of an online platform has become a pressing concern, not least as younger Chinese shoppers show an increasing readiness to buy online. Competitors like Carrefour and Auchan have both developed online shopping platforms to compete in the Chinese market.

The web’s impact may already be hitting its stores. Yes, Walmart reported a 16.1% increase in sales in the three months to the end of October compared to the previous year. And individual shoppers were spending more money per trip. But actual visitor numbers were worryingly enough down 7.1%. The suspicion is that more of them may have been shopping online instead.

In a fiercely competitive retail market, Walmart likely views the deal as a way of luring new shoppers too. “People who order from Yihaodian tend to be more premium customers and that is a decent direction for the company,” says James Roy, from China Market Research Group. “It shows that they are trying something new.”

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