China Consumer

Retail realities

Walmart sells its Chinese online store

Empty shopping cart is seen at a branch store of Wal-Mart in Beijing, China

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For years there has been a debate about whether Amazon will topple Walmart as the world’s largest retailer, underlining a trend in which consumers shun bricks-and-mortar stores to shop more online. In one interpretation, Walmart has already lost its top spot. But instead of Amazon, it was China’s Alibaba that did the damage earlier this year.

Back in March, Alibaba announced that it had surpassed Walmart to become the world’s largest retailer with annual gross merchandise volume on its retail platforms of $485 billion, compared with Walmart’s revenues of $482 billion.

“We took 13 years to demonstrate the power of a different business model compared with brick-and-mortar retailers,” the e-commerce company celebrated in a statement.

Walmart’s efforts to reverse the trend – at least in China – haven’t shown much success of late. And last week, it said it has sold Yihaodian – a Chinese e-commerce site that specialises in grocery and other household items – to JD.com, Alibaba’s archrival. As part of the deal, Walmart will receive a 5% stake in JD.com, worth about $1.5 billion at its current Nasdaq price.

The retail giant purchased 51% of Yihaodian in 2011 (see WiC140) and bought the rest of the company last year to strengthen its e-commerce operations and merge them with its physical stores. Only a year after the deal closed, the sale to JD.com has caught the industry by surprise.

Insiders say the move is Walmart waving the white flag as it faces up to the harsh realities of China’s e-commerce landscape. Data from iResearch suggests that Yihaodian accounts for less than 2% of market share, for instance, while Alibaba and JD.com control over 80% of online sales between them.

“The reality is that e-commerce is hyper-competitive in China and it is tough for any platform to make money,” Ben Cavender of China Market Research Group told Reuters. “Selling up in return for a 5% stake in JD.com is a good way of staying in the space while reducing the risk.”

Or as China Business Journal more colloquially puts it: “The biggest winner in the deal is definitely Walmart. Not only did it get rid of the chicken rib [i.e a bit with little meat], it even got a good price for it.”

After Walmart took over, it reduced the number of sellers on Yihaodian’s platform and reorganised the supply chain, hoping to streamline the business. Nevertheless, there wasn’t much evidence that Yihaodian was going to become a challenger. “The e-commerce landscape is vastly different between China and the US. While Walmart has perfected supply chain management between online and offline business in the US, in China, Yihaodian and Walmart have their own operations, thereby having little or no synergy,” Lu Zhen, a retail expert, told Jiemian, a business news portal.

As part of the deal, Walmart stays as a seller on Yihaodian and its Sam’s Club brand will open a flagship store on JD.com. That means that Walmart can piggy-back on JD.com’s infrastructure. China’s second largest e-commerce firm already has 6,000 delivery and pick-up stations (Yihaodian operates just 250 hubs), which will speed up shipping and improve availability, increasing Walmart’s sales.

“Every penny invested in Yihaodian is a penny taken away from elsewhere in the business. Given that Walmart’s physical stores are also struggling with a decline in foot traffic, it makes sense to stop the bleeding in the e-commerce business first,” China Economic Times affirms.

Increasingly, consumers want to shop for food online. Last August JD.com bought a 10% stake in Yonghui, a supermarket chain, as part of its strategy to allow shoppers to order groceries and fresh food and have them delivered within two hours.

Of course, JD.com will also hope to draw on Walmart’s retail expertise as part of the latest deal. “Walmart’s existing relationship with a large number of suppliers is going to give JD.com such an advantage,” says China Business Journal. “In addition, the strategic cooperation with Walmart is a big step for JD.com’s global expansion, giving it a shortcut and saving it a lot of effort.”


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