Greg Foran, the CEO and president of Walmart, made a huge announcement during the annual Walmart Shareholders meeting in June 2016. Walmart stated its plan to sell its e-commerce business to the no. 2 in the industry, JD.com in China. This sale is a strategic decision for Walmart’s future in China according to Foran. Like most foreign companies, it seems to be a critical strategy for foreign companies to penetrate the Chinese market.
JD.com Inc is indeed (after Alibaba), the second-biggest online retailer in China. The company would own the Yihaodian marketplace thanks to the Walmart deal, according to JD.com. The number of shares issued by JD.com go up to 5% of the total shares in Walmart, and ultimately sum up a merger of about $1.5 billion based on JD.com’s latest share price.
The American subsidiary of JD.com recorded depositary receipts of about 6.5% at $21.44 on the Nasdaq Stock Market
By collaborating with JD.com, Walmart would have a real opportunity to compete in the cut-throat retail industry in China and also increase its sales in the US market.
Walmart had some hard times in China
Nevertheless, building its business in China was a tough challenge for Walmart, and it was a long process before they realized the Walmart we know nowadays in China. Their expansion started when they opened their first retail store in 1996, Walmart has 430 stores in China today.
According to the consulting firm iResearch, Yihaodian has a 1.5% market share in the online sales industry. The success of Yihaodian is quite surprising after the announcement by Walmart in July 2015 stating that it took control of the whole venture from its partner, with a payment of $760 million for the 49% left. The executives planned to expand faster, by being part of the online and mobile shopping market In China. As a consequence, they would slow down their store expansion in China. Walmart strived to connect its physical activities to online operations in Yihaodian’s market, to keep up with the Chinese environment, which is evolving fast and digitally. The needs of the Chinese are constantly changing. They are more willing to buy online, accept online offers and buy faster as well, this could lead to major opportunities after this collaboration with JD.com.
After this decision, Walmart’s China sales in existing stores recorded a slight increase according to Chief Executive David Cheesewright. He says that opportunities would be coming up soon, he cited the weakness of the Chinese economy so far, and the strong domestic competition as factors hindering their growth. Walmart hopes to develop through the growth of Sam’s Club, a warehouse chain developed locally. It represents about 10% of the Chinese sales for Walmart, and there is definitely more to come in the next few years. Sam’s Club is about to shift to the core of Walmart’s online business strategy. Walmart plans to base its online e-commerce platform on Sam’s Club stores to better utilize this partnership with JD.com.
A strategic partnership
JD.com became popular with its tendency to buy brands in the electronic industry. Part of its strategy to diversify its offer is by providing a wider range of products, JD.com has to compete with the e-commerce giant Alibaba, which is operating through Taobao and TMall in China.
JD.com has become the second largest retailer. Its revenue growth has indeed gone past Alibaba’s for over a year. But Alibaba is still ahead in the online retail industry. Thanks to TMall’s market share, 58% in comparison with the 23% for JD.com, according to the data stated by the consulting firm iResearch.
Yihaodian’s market has been tailored so far for grocery sales, where competition escalated during the last year. Local retailers have started to sell online and many startups have become specialized in specific imported products like avocados or dishwashing detergent.
JD.com has diversified its offers as well, providing a wider range of food. It has for instance invested in FruitDay, a Chinese online retailer, and is developing further its imports including making deals with Australian milk companies and US meat producers.
Walmart took part of the equity capital of Yihaodian in 2012 while Walmart was founded in 2008. Morgan Stanley, the consulting firm has advised Walmart on this deal with JD.com, so no doubt the company knows where it is headed over the next few years in China.