Wal-Mart (NYSE:WMT) announced a partnership with China e-commerce company JD.com (NASDAQ:JD) in a move that should make both companies more competitive in China's retail industry. Wall-Mart is selling its online marketplace, Yihaodian, to JD.com in exchange for 145 million shares of JD stock (equivalent to roughly 5% of the shares outstanding). In addition, Sam's Club China will open a store on JD.com, and Wal-Mart's China stores will be listed as preferred retailers on JD's food delivery platform, O2O Dada. We think the partnership makes sense for both companies and so far the market seems to agree: shares of both companies are trading higher following the announcement.
For Wal-Mart, the partnership will grow the company's footprint in China's high-growth e-commerce market, and provide its physical stores with increased traffic from JD's massive user base. JD.com is the second largest e-commerce company in China. Its large, self-controlled fulfillment infrastructure allows for same-day delivery and is a key competitive advantage. According to Morningstar, by taking ownership of warehouses and personal delivery, the company can deliver goods to customers in a timelier manner. JD's main rival Alibaba (NYSE:BABA) has its own logistics infrastructure of course, but follows a different strategy. BABA is building its platform around a core of centralized assets and Big Data, and uses third parties for final delivery. There are advantages and disadvantages to both. JD's more labor-intensive system is costlier, and allows for less operating leverage during periods of strong sales volumes. But it provides greater control over delivery time and service quality, two important factors that customers consider when choosing where to shop. Greater efficiencies in customer acquisition and logistics should allow WMT to capture a larger share of the retail pie in China.
JD.com also benefits from the deal, as Wal-Mart's Yihaodian business will provide the firm with greater product and geographic diversity. JD is first and foremost an electronics retailer. While the company has expanded its product range as the retail industry has shifted online, it still lags far behind BABA in terms of product scope. Yihaodian gives JD greater access to markets in east and southern china, and will allow it to offer a wider range of groceries and household items. This includes a number of import goods that are not widely available in China. Going forward, imports will comprise a growing portion of the e-commerce market as regulators have taken measures to facilitate consumption of foreign goods. JD is now in position to capture a larger share of this market.
The retail market is at a mature stage in the US, and WMT's strategy of pricing below the competition limits the extent to which the company can growth through inflation. WMT must turn to emerging markets for growth, and China is the most lucrative opportunity. While growth has slowed during the country's shift from an export-driven to consumption-based model, the growth potential is still enormous. PWC estimates that, thanks to the rising middle class, China will soon overtake the US as the largest retail market. But the competition is intense. As is the case in the US with Amazon, e-commerce has disrupted the industry and stolen customers from traditional brick and mortar retailers. We believe the alliance with JD will give WMT a stronger foothold in the region, and allow it grow revenues at a much faster rate in China than it otherwise would be able to alone.
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