The giant retailer Wal-Mart (NYSE:WMT) continued to strengthen its growing businesses when, in a quick turnaround, it sold its entire stake in Yihaodian to the Chinese e-commerce giant JD.com (NASDAQ:JD). This deal is another step in a process that Wal-Mart started last year to accelerate growth in emerging revenue streams by restructuring brick-and-mortar operations domestically and worldwide and expanding its e-commerce business.
In its physical locations operations, Wal-Mart made some restructuring decisions that received plenty of media coverage and aimed to improve traditional stores' business profitability. Earlier this year, Wal-Mart announced that it reviewed its entire store business and decided to close the Wal-Mart Express brand with its 102 locations and additional 52 stores in the US and Puerto Rico. Internationally, the company closed 60 underperforming stores in Brazil and 55 small loss-making stores in other Latin American locations. In Asia, the company set a target to open up to 50 new locations in India while, in Japan, it will remodel the stores instead of opening new ones. The rationale behind the broad restructuring is to strengthen the core business to enable a safer journey by expanding the e-commerce business, which, in my opinion, is the big story in Wal-Mart's future.
It is clear that while Wal-Mart operates an enormous and fruitful brick-and-mortar stores business worldwide, the direction the company is taking is toward e-commerce due to its benefits compared with physical locations. This is, of course, a long and painful process to go through. However, it is inevitable to create a long-term sustainable business in today's world.
Wal-Mart's e-commerce efforts are not new, but there are a few actions the management took to accelerate the shift towards e-commerce and encourage growth in that segment. Last year, as the CurrentC launch was delayed, Wal-Mart kicked off Wal-Mart Pay, an interim solution to provide the necessary e-payment capabilities the company was looking for to improve customer experience and optimize the payment process in its physical locations. Wal-Mart Pay is not as sleek and easy as Apple Pay (NASDAQ:AAPL), Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android Pay, or other services, but it provides a good temporary solution until Wal-Mart decides whether to adopt CurrentC in the future. As the e-payments market grows worldwide, Wal-Mart cannot afford itself to stay behind no matter what the reason is, and by launching Wal-Mart Pay, the company demonstrates how committed it is to implement e-payment capabilities that could be later leveraged to support its e-commerce business.
To support a potential e-commerce growth, Wal-Mart tries to tackle the major issues like shipping costs, shipping speed, execution logistics, and pricing. To address the shipping process problems, Wal-Mart decided to increase packages each delivery carrier carries to reduce cost per package, introduced a two-day shipping service to compete with Amazon Prime (NASDAQ:AMZN), moved more inventory to massive warehouses around the U.S. to improve shipping speed and item availability across the country, and chose an aggressive pricing strategy to compete with other online platforms.
Outside of the U.S., Wal-Mart gave a high priority to the Chinese e-commerce market as the e-commerce space grows there and, coupled with greater demand for a broad variety of goods, could boost e-commerce revenues. To do that, Wal-Mart invested a few years ago in a small Chinese e-commerce vendor called Yihaodian, thinking that combining its strong brand and unmatchable retail business knowledge with Yihaodian's knowledge of the Chinese e-commerce market will result in a great success. Last year, Wal-Mart completed the Yihaodian acquisition when it bought the remaining 49% of the company for $760M. However, the company failed to challenge the market leader Alibaba (NYSE:BABA) and JD.com, which together control more than 80% of the e-commerce market compared with only 1% held by Yihaodian. As mentioned above, Wal-Mart sold Yihaodian to JD.com for $1.5B in stocks that will entitle Wal-Mart to a 5% stake in the Chinese e-commerce player.
Both companies will benefit greatly from this deal. Wal-Mart could leverage JD's extensive operations in China to offer more items online to more users than it did before and introduce Sam's Club online to the JD user base in China. JD could increase its variety of imported goods and expand to southern and eastern China through Yihaodian. Wal-Mart will open the Sam's Club online site in China to JD.com, and JD will be responsible for the fulfillment process through its nationwide warehouses and delivery networks. The Yihaodian deal will allow Wal-Mart to focus on its retail strengths and allow JD to manage the local Chinese logistics, which will allow Wal-Mart to expand in China, not independently, but through JD.
Wal-Mart's latest actions in the e-commerce space aimed to grow e-commerce business worldwide and compete directly with Amazon and Alibaba. In the long run, I believe Wal-Mart will grow to become a significant player in the e-commerce market globally, and its recent actions reaffirm this thesis. Beside the solid balance sheet and dividend yield, I like Wal-Mart as a long-term investment, which I expect will grow by accelerating its e-commerce business. I currently hold Wal-Mart's April 2021 bonds, and I am planning to open an equity position gradually.
Disclosure: I am/we are long AAPL.
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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