HITTING THE WALL

Walmart has given up on becoming an e-commerce giant in China

Obsession
China's Transition
Obsession
China's Transition

Walmart’s China ambition appear to be cooling.

Walmart and JD jointly announced that the American retailer would sell its e-commerce division, known as Yihaodian, to the Chinese online retailer. In exchange, Walmart will take a 5% equity stake in JD’s outstanding shares, amounting to about $1.5 billion at the company’s current valuation. Walmart will also become a “preferred seller” on one of JD’s grocery delivery apps, while Sam’s Club will open a store on JD’s flagship e-commerce site.

The deal doesn’t mark the conclusion of Walmart in China, which remains a “strategic market” for the future, as CEO Doug McMillon said recently. But it’s a bitter moment in the American chain’s trek through the Middle Kingdom, which has not been easy.

Walmart opened its first store in China in 1996 in Shenzhen, the southern port city synonymous with economic liberalization. It now has more than 430 outlets across the country. But they have been plagued with issues ranging from shoddy accounting to food safety scandals to that time it sold fox meat labeled as donkey meat.

Business appears to be weak, too—the company doesn’t publicly release sales data for its China stores. But a report from a local joint venture partner operating 21 stores in the country revealed that sales dropped 6% annually throughout 2014.

One ongoing problem for Walmart’s retail business is the country’s undeveloped logistics infrastructure. China’s roads and railways are not as developed as those in the US. This makes Walmart’s style of retail dominance—driven by the low prices that follow efficient logistics and economies of scale—more difficult in China than in the US.

The top 100 brick-and-mortar retail chains make up a majority of overall retail sales in the US, but in China, the industry is more fragmented.

E-commerce was supposed to revive Walmart’s ailing fortunes in China. In 2012, the company took a 51% stake in Yihaodian, a middling player in China’s e-commerce industry, based in Shanghai. It took full ownership of the company in 2015.

But Yihaodian never quite caught up to its competitors—in part because it was late to China’s e-commerce boom when it launched in 2008. JD, Yihaodian’s closest analog, started in 1998. Alibaba eBay-esque Taobao had been live for years.

To date, Yihaodian retains just over 1% market share of China’s $139 trillion business-to-consumer e-commerce industry—far behind JD and Tmall. When two of Yihaodian’s key executives departed in July 2015, the writing was on the wall for the venture’s dissolution.

Yihaodian’s sale to JD marks a pragmatic pivot for Walmart’s e-commerce business in China. Rather than trying to compete directly with e-commerce giants, it will simply help them sell high-quality, foreign products and hopefully profit from the proceeds.

This approach has already become popular among American retailers looking to enter China. Costco, a major Sam’s Club competitor, opened a flagship store on Alibaba’s Tmall in late 2014. Macy’s did the same thing in August 2015. Standing on the shoulders of a Chinese online giant might prove less costly and more lucrative than trying to become one.

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