In retrospect, it probably wasn’t the outcome Wal-Mart Stores, Inc. (WMT) had in mind almost a year ago when it acquired the remaining 49% of Chinese e-commerce outfit Yihaodian.com so it could take full control of the company to penetrate China’s consumer market.
But, it’s better for Walmart and owners of WMT stock that the company recognizes early on that it’s not going to make a dent in the presence Alibaba Group Holding Ltd (BABA) already has in that arena as long as it’s operating on its own. It needs a partner with an inside track.
That’s why Monday’s news that it’s looking to sell Yihaodian to JD.Com Inc(ADR) (JD), which is far more capable of leveraging its existing presence on China’s e-commerce landscape to make Yihaodian.com a contender, is pretty exciting for WMT investors.
And, better still, Walmart is reportedly structuring the rumored deal in such a way that allows it to strengthen its brick-and-mortar position in that all-important overseas market.
Walmart Is Better Off Without It
Bowing out of Yihaodian wouldn’t be a bad idea. For all of its efforts, Walmart’s Yihaodian.com still only controlled less than 2% of the nation’s e-commerce market as of the last look. JD owned 20%, while Alibaba’s market share was a whopping 47%.
This comparison may drive the point home: Whereas Yihaodian operates 250 delivery/distribution hubs, JD operates 6000 and Alibaba boasts more than 14,000 pickup stations in rural areas alone. Walmart couldn’t beat ’em, so it’s now looking to join ’em.
That being said, the addition of Yihaodian to the JD.com family would be a savvy pickup for JD as well.
Although not necessarily by intent, JD.com was largely established and still known as a place to get electronics. In the meantime, it has worked to win more grocery business, though hasn’t done exceedingly well on that front. Conversely, Yihaodian.com was largely built from the ground up as a grocery venue.
Although the site has found reasonable success in that particular sliver of the retail world, Walmart has seen formidable grocery and staples competition pop up in the meantime. JD may be better suited to keep Yihaodian competitive than Walmart was.
That being said, perhaps the biggest upside to the value of WMT stock in a tie-up between Walmart Yihaodian and JD.com is rooted in the sidebar that has yet to be explained clearly … how an acquisition agreement could be forged in a way that also benefits Walmart in perpetuity.
Perhaps the biggest and best way this could happen in the shadow of Yihaodian’s sale is by continuing to link the retailer’s physical presence with its digital one. An in-store order pickup could be one benefit; foot traffic is crucial to any retailer. It also can’t be denied that while Yihaodian may not have garnered much market share, Walmart clearly has access to merchandise and a supply chain that could help JD sell more items online.
Bottom Line for WMT Stock
While Walmart isn’t exactly walking away empty-handed, there’s no getting around the fact that this is a step back for Walmart’s e-commerce ambitions in China. It’s a smart step back for the company though, which is largely why WMT shares have jumped on the news of the impending retreat.
It’s just another of some tough, and unpopular, decisions WMT has had to make this year. Among the biggest of those is January’s decision to close 269 stores due to sub-par performance.
Such a maneuver would have been very un-Walmart-like just a few years ago, but the company’s recent look at itself in the mirror (an honest look) has prompted some much-needed, even if painful, changes. Ditto with its investment in its e-commerce presence, which has woefully lagged the likes of Amazon.com, Inc. (AMZN).
In the end, it’s best not to fight a battle you can’t win, burning money and focus that would be spent on better opportunities. Dumping Yihaodian doesn’t make WMT stock a buy alone, but it sure doesn’t hurt the bullish case.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
