Wal-Mart: Taking A Back Seat In China's Ecommerce Arms Race?

| About: Wal-Mart Stores, (WMT)


Chinese media reported that WMT is selling its stake in Yihaodian to JD.com in a transaction that's valued at $6bn USD.

Positive implication to WMT as it can focus on offline expansion in lower tier cities. Positive implication to JD with incremental scale and category expansion.

BABA remains the dominant ecommerce player in my view and this does not change my long-term thesis on the stock.

Chinese media reported that Wal-Mart (NYSE:WMT) is selling its majority stake in its Chinese ecommerce asset Yihaodian to JD.com (NASDAQ:JD) for roughly Rmb 40bn (or slightly over $6bn USD at the current exchange). Neither WMT nor JD has confirmed the transaction but media pointed out the deal in late stage discussion. Given that China's ecommerce market is highly competitive with Alibaba (NYSE:BABA) dominating both the B2C and the C2C segment, and JD.com a close second, there is little room for WMT's Yihaodian to remain competitive.

Although Yihaodian has some market share in the Tier 1 cities such as Beijing and Shanghai, the platform is simply uncompetitive vs. the larger players so consolidation was imminent. Taking a back seat in China's ecommerce and focusing on WMT's offline retail locations makes more sense given that the current offline traffic continues to drive profitability in the region and that there are plenty of runway for growth in the lower tier cities where urbanization is progressing. A smaller strategic in the JV with JD allows WMT to have an online exposure but is unlikely to make WMT a competitive player in the field. As for JD.com, acquiring Yihaodian certainly adds to the scale but it is still too early to gauge the medium-term impact Yihaodian may have on JD's long-term competiveness. While BABA was also part of the discussion on acquiring YHD, BABA ultimately backed out of the discussion and I suspect that is because BABA is already overtaking YHD in major markets.

WMT's entry into China's ecommerce space started with its strategic stake in YHD back in 2012 when it bought a 51% stake. Back then the idea was that with WMT's backing, YHD could differentiate itself by offering foreign products in to the Chinese consumers. This certainly had an appeal to first tier city residents that have above average income, and helped YHD to gain market share. WMT ended up acquiring remain shares of YHD but the competitive landscape quickly turned against YHD as BABA scaled up its logistics services and began to partner with foreign suppliers such as Costco (NASDAQ:COST) and Macy's (NYSE:M) that open stores on Tmall in increasing numbers. (See - Alibaba Benefits From Costco Going To China and Alibaba: Preparing For The Logistics Arms Race) Additionally, WMT's prior experience in offline retail was not a fit to YHD with differing management styles and strategic goals, and this largely resulted in the gradual decline of YHD over the past several years.

JD's acquisition of YHD is a strategic move that addresses several JD's shortcomings. First, the increased scale in ecommerce allows JD to remain competitive against BABA. Second, JD can leverage YHD to expand in the FMCG, fresh groceries and food categories that JD is not known for.

Conclusion, if there is any truth to this news then I would say that WMT's exit of China's ecommerce market is actually a positive given that the company can now focus on expanding in lower tier cities. As for JD, the acquisition is incrementally positive but I do not expect this to change my long-term thesis on JD (see - JD.com: In Free Cash We Trust?).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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