Trouble in store?

The stakes are high in the commercial struggle between Amazon and Walmart – the winner of the contest will be crowned by analysts as the world’s biggest retailer.

Amazon overtook Walmart in market value last July but the bricks-and-mortar retailer responded by driving its online business harder and upping its bets in China.

It bought out the remaining 49% stake in its Chinese e-commerce venture Yihaodian and announced plans to add 115 new stores in the country. But the online strategy hasn’t paid off and Walmart sold Yihaodian to its Chinese rival JD.com last month, less than a year after acquiring full ownership of the lossmaking unit.

The Yihaodian sale leaves Amazon as the last major American retailer standing in China’s e-commerce market, after eBay’s operations dwindled into insignificance following competition from Alibaba.

Earlier this year Walmart said it had been rethinking its store strategy too, announcing a plan to close 269 physical stores worldwide, including some in China.

The retailer insists that its plans to grow its sales in China remain in place. This month investors are wondering quite what the future holds, after a series of managerial decisions stoked unrest among its local staff, sparking wildcat strikes. So what might be next for Walmart (and Amazon) in China?

Walmart’s latest challenge

Walmart was hit by a series of strikes earlier this month, to protest against changes to working arrangements.

The Chinese media seems to be under orders not to cover the dispute but according to the Financial Times employees at a store in Nanchang began the action two weeks ago and it spread to a second Walmart outlet in the same city in Jiangxi, and then to stores in Chengdu (the capital of Sichuan province) and Harbin (the capital of Heilongjiang).

The FT also reported that workers have set up the Walmart Chinese Workers’ Association (WCWA) using WeChat, a popular messaging app, and that the group had multiplied into more than 40 divisions with about 20,000 members as of last week. That’s a fifth of Walmart’s workforce in China

The protesters have now returned to work, with their employer agreeing to consider their demands. Even before the current unrest, ThePaper.cn reported that workers had also been building an unofficial union, the Walmart Employees Network. The group has sent an open letter to the All-China Federation of Trade Unions (ACFTU), the country’s only official union (with more than 200 million members) asking for backing in their long-running dispute with the retailing giant over wages and working hours.

It remains to be seen whether the ACFTU will add its considerable weight to their cause. But ThePaper.cn is doubtful, noting that the state-run union tends to represent the government’s interests, with its priorities more on stimulating growth and preserving industrial harmony, rather than encouraging workers to seek better conditions (see WiC64 for more on China’s ‘top-down’ approach to industrial relations).

Indeed, the central government may see its interests as more aligned with Walmart’s for the time being. Hong Kong-based labour groups reported 2,773 cases of industrial unrest in China last year – an increase – but with the State Council intent on closing down so-called zombie firms (companies that survive on state subsidies), more worker unrest is likely.

So Beijing will want to prevent the Walmart unrest grabbing national attention, lest it spill over into other parts of the economy.

That said, while the ACFTU may well withhold public support for the strikers, Walmart bosses must be getting the signal from policymakers that they would prefer a face-saving compromise.

And with Walmart now considering the employees’ demands, a solution may be in the works. Any such deal, mind you, looks likely to add to its operating costs, making conditions tougher in a country where it was already struggling.

Why did Walmart sell Yihaodian?

Yihaodian specialises in grocery and household items and Walmart bought a 51% stake in the platform in 2011. It purchased Yihaodian outright a year ago and analysts were waiting to see whether the American colossus would take market share from Chinese rivals, such as JD.com.

Thus it was something of a surprise when Walmart raised the white flag last month (see WiC331).

In return it is getting a 5% stake worth $1.5 billion in JD.com, the second largest e-commerce player behind Alibaba.

All the same, Doug Young, a columnist who writes about Chinese business, has likened the deal to other retreats by American firms, which have failed to impose themselves in China’s highly competitive internet market.

Walmart now seems happier to take more of a backseat approach – i.e. one that allows it to learn from its rival-turned-partner in China. The Wall Street Journal has reported that Walmart will get “observer status” at JD’s board meetings if it exercises an option to raise its stake to 10%. And in a media briefing this week, Walmart officials suggested that they are in “a marriage” with JD and are preparing themselves for the long haul in China. Leaders from both firms have been meeting on a weekly basis, they said, to discuss how to deepen their strategic cooperation.

Selling the e-commerce business will free up time for Walmart executives to concentrate on their bricks-and-mortar business too. Longer term critics of the company say that it has underestimated the difficulties of scaling up its business model in China, and that it is struggling to recreate the core advantages that it enjoys in countries like the US – especially its super-efficient supply chain.

Another concern is that the retailer hasn’t got to grips with the diversity of the Chinese market, where consumer tastes can differ significantly from city to city. Walmart needs to serve different audiences across the 25 provinces in which it operates in China – and perhaps a closer relationship with a domestic partner will help it find a better mix.

Seven kingdoms strategy…

Local observers sometimes liken China’s corporate rivalries to those of the Warring States period, when rival kingdoms fought themselves to a standstill, switching from uneasy alliances to outright hostility, and then back again (see WiC296).

Walmart’s more patient approach, CBN has suggested, actually points to a better understanding of the nature of China’s business world. For instance, by allying with JD it also gains a common strategic partner in Tencent (which bought a 15% stake in JD in 2014). Both Walmart and Tencent share a common enemy: Alibaba.

Some of the tactics employed by Amazon look similar. It forged an alliance with Gome in May to cooperate with the electronics retailer on e-commerce and logistics operations. The move came less than a year after Alibaba had invested $4.6 billion in Gome’s larger rival Suning (taking a 20% stake). Amazon has thus allied with another party outside the Alibaba camp. But in true Warring States style, it has kept its options open by working with Amazon too. Rather than simply going head-to-head with Jack Ma’s firm, Amazon has launched its own store on his Tmall platform to sell international goods to Chinese consumers as well (see WiC274). In turn this means that Amazon and Walmart are placing their bets on separate local platforms. While Jeff Bezos has gone with the online market leader Tmall, Walmart will launch its Sam’s Club internet store on JD.com in the coming months.

How is Amazon doing in China?

Amazon started in China in 2004 by acquiring an e-commerce venture co-founded by Lei Jun (the tycoon has since set up smartphone maker Xiaomi). However, Amazon hasn’t performed as successfully in China as elsewhere, struggling to win a commanding share of a brutally competitive marketplace.

According to CBN, Alibaba’s Tmall accounted for 58.6% of B2C e-commerce sales during the first quarter of this year, while JD.com was second with 21.%. Suning came third, with only a 3.8% share. The remaining players such as Amazon China and Yihaodian have even less than that (of course, Yihaodian’s online sales will now be absorbed by JD.com).

Some of Amazon’s challenges in China aren’t wholly different to Walmart’s, or indeed those in some of its other international markets. Sales in North America have been growing much faster than globally, in part because not all of its overseas markets can handle services such as same-day deliveries. Many of Amazon’s newer features tend to be exclusive to the US and other highly developed economies, for instance.

Amazon’s chances of growing a large, profitable share of online sales in China also look slim, says Young, who points out that even JD’s latest quarterly results showed a $140 million loss. “In that kind of environment it will be really hard for Amazon to make a major mark anytime soon. What’s more, the Chinese players are mostly controlled by their founders, who would usually rather see their companies go bankrupt than cede control to a rival. Accordingly, Amazon really does look like the next biggest bet to surrender in China, though such a move could still be a few years off,” he predicts, following Walmart’s exit from Yihaodian.

Last year, Doug Gurr, then president of Amazon China, told Caixin Weekly that the American firm’s goal isn’t to become the largest e-commerce platform in the country, but to use its expertise in global e-commerce to build bridges between Chinese consumers (as well as vendors) and overseas markets.

“We take China as a strategically important locale from a global perspective and will continue to invest in China,” he said in the interview.

In fact, Amazon has been repositioning its business in China since 2014 and focusing primarily on cross-border e-commerce, which is known as haitao by Chinese customers (shopping for overseas goods via online platforms). The trend has flourished because local consumers often have more trust in products shipped from outside China. And as shoppers become more discerning they are also favouring niche foreign brands that cannot be bought at home.

So Amazon is yet to see the best from China?

Amazon’s market capitalisation now exceeds Walmart’s by nearly $120 billion. This week – just ahead of Amazon’s second ‘Prime Day’, a shopping festival inspired by Alibaba’s Singles’ Day – its market value surpassed $350 billion for the first time. It is now a whisker away from overtaking Berkshire Hathaway as the fifth biggest listed company in the US.

Securities Daily also calculates that Amazon is worth more than the combined value of all of the Chinese e-commerce firms that have floated in the US, which includes Alibaba and JD.com. And there may be further upside from China too, as it looks well positioned to benefit from the increase in cross-border e-commerce.

“Chinese consumers love to haitao and Amazon is looking to feed that need,” China Daily agreed.

The newspaper added that Amazon has advantages in these cross-border sales because of its costly investments in logistics services. By the end of 2015 it had established a network of 109 fulfilment centres worldwide in 185 countries. Thirteen are located in China, where Amazon has also opened up its distribution network to other Chinese firms. It now guarantees same-day delivery to 1,400 cities, reaching nearly 3,000 cities and counties in total in China. New arrangements in some cities also have the potential to make importing goods less costly for foreign firms, which is one of the factors in explaining why Amazon is setting up shop in Shanghai’s free trade zone (see WiC250).

Likewise, for Chinese manufacturers looking for ways to reach American consumers, Amazon has become “China’s gateway of choice”, says Kenneth Rapoza in Forbes magazine (see WiC327 for how reviews on the site boosted sales of Mayinglong’s haemorrhoid cream in the US). Amazon’s effort to court these Chinese suppliers has generated frustration among their American counterparts, who claim that there is a growing problem with counterfeit sales on the company’s platforms. But as another cross-border sales channel, it plays to Amazon’s strengths.

“It’s becoming increasingly clear that Amazon is not merely a book industry disruptor, but a retail disruptor in general. Bad for Macy’s. Bad for Walmart. Good for Amazon. And, not surprisingly, spectacular for Chinese manufacturers,” remarks Rapoza.

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