Wal-Mart Stores (NYSE: WMT) and China’s JD.Com (NASDAQ: JD) have come together in a move that will see the two try to own a larger stake of retail sales in China, a huge, but notoriously cut-throat market. Wal-Mart tried to go it alone to break into the world’s second biggest economy with its acquisition of the online Chinese grocery retail site Yihaodian eleven months ago. Now, Yihaodian was a bargaining chip in teaming up with JD.com, the second biggest online retailer in China behind only behemoth Alibaba (NYSE: BABA).
After soft online sales, Wal-Mart realized its current path was getting them nowhere. So, Wal-Mart gave up ownership of Yihaodian for a 5% stake in JD.com, valuing Yihaodian at roughly $1.5 billion. Per the deal, Wal-Mart will continue to operate Yihaodian under JD.com ownership.
Wal-Mart has further been going through its 400 brick and mortar locations in China and shuttering underperforming stores. With about one-third of its profits coming from China, it’s an important market for Wal-Mart.
Who Got the Best End of the Stick?
According to the principal of the China Market Research Group, Ben Cavender, the ecommerce sector in China is super competitive, which makes the ground even tougher for anyone who wants to invest in the same sector. This means that Wal-Mart made a smart move by selling Yihaodian, de-risking its investment in the country and getting in the ring with Alibaba, which could pay better rewards.
According to the data retrieved from iResearch, Yihaodian accounted for only two percent of online sales in China. JD.com and Alibaba take home a lion’s share of eighty percent.
With JD.com’s existing logistics, warehousing capacity and footprint, taking over Yihaodian is a good fit. For JD.com, the deal could provide a boost in its intensifying competition in the fast-growing online grocery business with Alibaba. Research firm IGD forecasts this market will soar to almost $180 billion in 2020 from only $41 billion in 2015.
It is not certain that Wal-Mart will let JD.com use all of its resources. After all, five percent is not a sign of great commitment. For some analysts, the deal seems to be leaning on Wal-Mart’s side instead of JD.com. Wal-Mart gets rid of a business they don’t need and gets a new way of doing business, while JD.com has to grow a struggling business that is only capturing a miniscule part of the market. On the other hand, JD.com needs an established brick and mortar retailer partner and therefore there is a high possibility of the future being bright on that front.
Call Wal-Mart the winner at the outset, with JD.com in a nice spot to try and capitalize on a market that’s expected to boom. Of course, Wal-Mart wins again on that front with its stake in the company.
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