Walmart recovers and JD.com goes separate ways in China – Bamboo Works

The US retail giant sold its stake in the Chinese e-commerce giant to focus on its own operations in China, ending an eight-year marriage

Key findings:

• Walmart sold its stake in JD.com at a time when its Chinese business is benefiting from a growing local preference for Costco’s warehouse-style shopping.
• JD.com continues to face strong competition in China’s tough e-commerce market as consumption in the country remains sluggish

By Xiao Lin

There are no eternal allies or enemies, only a constant change of alliances, said the British statesman Henry John Temple over a century ago with the famous phrase: “Our interests are eternal and permanent, and it is our duty to follow those interests.”

This perspective seems particularly relevant in explaining the split between the US retail giant Walmart (WMT.US) and JD.com Inc. (JD.US; 9618.HK), one of China’s leading e-commerce companies, ended a business relationship that had lasted more than a decade.

On August 21, Walmart formalized a divorce of sorts from its partner of eight years when it sold its 9.4 percent stake in JD.com. The timing of the split coincides with the end of an eight-year non-compete agreement between the two companies in China’s vast e-commerce market.

“This decision allows us to focus on our strong China operations for Walmart China and Sam’s Club and deploy capital to other priorities,” Walmart said after announcing the separation, adding that it will continue its strategic partnership with JD.com. Walmart received about $3.6 billion from the sale.

JD.com tried to soften the shock of the divorce by saying it was confident in the two companies’ future cooperation. On a practical level, the company also bought back $390 million worth of its own shares, using up the balance of its $3 billion share buyback plan announced in March.

Walmart continues to be present on JD.com and dada (DADA.US), JD.com’s inner-city delivery service platform, in which Walmart still held a 9% stake as of March 31.

But the sale of such a large stake, not to mention the loss of such a high-profile partner, was bound to impact JD.com shares. The stock closed about 9% lower in Hong Kong last Wednesday, trading at less than a third of its all-time high set in February 2021. Walmart shares moved in the other direction, rising 0.6% to an all-time high of $75.58.

The split and the stock reaction that followed reflect investors’ concerns about JD.com’s future, but it’s also a small positive sign for Walmart as it tries to find its way in the vast but highly complex Chinese retail market.

Walmart’s interest in JD.com dates back to 2010, when the company wanted to invest in the upstart company’s C round of financing, according to a state media report. At the time, Walmart had 189 stores in 101 cities across China. JD.com was already China’s second-largest e-commerce platform, behind only Alibaba’s (BABA.US; 9988.HK) extremely popular Taobao.

The investment ultimately fell through. According to market rumors, it was thwarted by Walmart’s insistence on a majority stake in JD.com – something the company’s flamboyant founder Richard Liu refused to do. Walmart then bought Yihaodian.com, a Chinese online grocery store, to expand its e-commerce presence in China. Walmart later increased its stake and finally took over the service completely in 2015.

Meanwhile, JD.com listed Walmart as one of its competitors at the time of its U.S. IPO in 2014, when foreign investors were still excited about the enormous potential of e-commerce in China.

Perfect match?

The two former rivals quickly changed their minds with the announcement of their groundbreaking partnership in 2016. Under this “Made in China” partnership, Walmart handed over Yihaodian to JD.com in exchange for 5% of JD.com’s shares. While Walmart gained access to JD.com’s e-commerce infrastructure, JD.com included more imported goods from Walmart, giving it an edge over Taobao.

At the time, JD.com was rapidly expanding into China’s smaller markets, which had been largely neglected due to their lower consumption power but whose hundreds of millions of consumers represented a huge business opportunity. JD.com’s platform and logistics networks were invaluable to Walmart, whose hundreds of brick-and-mortar stores were facing competition from e-commerce. Rumor had it that Walmart’s high hopes for the partnership with Yihaodian were running afoul of its fortunes.

The Walmart-JD.com tie-up was received very positively, and both stocks rose following the news. By the end of the year, Walmart had increased its JD.com stake to 10%, and Walmart’s sales on JD.com tripled a year after the partnership began.

Clean separation

In the eight years since the wedding, Walmart has built its own logistics and distribution network in the country. More importantly, the company has reduced its traditional store network and shifted its focus to increasingly cautious consumers who are passionate about value for money. The Sam’s Club brand has successfully embraced this trend, bucking the current sluggish consumer market in post-pandemic China.

In Hong Kong, travel to the neighboring city of Shenzhen to shop at Sam’s Club and rival Costco (CSCO.US) has become a popular day-trip destination. Sam’s Club stores in other Chinese markets are often packed with bargain hunters.

Walmart beat market expectations when it reported a 4.8 percent increase in sales in the second quarter of this year. Part of that boost may have come from China, where sales rose 17.7 percent to $4.6 billion despite the weak market, led by a 44 percent increase in local e-commerce sales.

“In China, strong membership trends and Sam’s Club continue to drive double-digit sales growth, and about half of our sales there are digital,” Walmart CEO Doug McMillon said on the company’s quarterly earnings call.

While Walmart is ready to go it alone in China, it is far less clear whether JD.com is enjoying the separation as the company faces numerous headwinds, from fierce competition to growing geopolitical tensions that are scaring international investors away from the company’s U.S. and Hong Kong-listed shares.

For years, JD.com focused on building its platform, known for high-quality electronics and its own logistics network that guarantees on-time deliveries. But faced with increasing competition, the company has expanded its original direct-selling model and added more smaller third-party stores to its platform to better compete with Taobao. The company is also experimenting with low prices and subsidies to compete not only with Taobao but also with other sellers. Traffic rules (PDD.US) and livestreaming e-commerce platforms such as Douyin.

JD.com has started to follow suit by trying to boost its livestreaming sales, which are currently all the rage in China, but so far it has gained little traction. Meanwhile, in 2019, PDD overtook JD.com to become China’s second-largest e-commerce platform. Late last year, it overtook Alibaba to become the country’s most valuable e-commerce company by market value. Reflecting current investor sentiment, Alibaba now trades at the highest price-to-earnings ratio of 21 of the trio, while PDD follows at 13 and JD.com is last of the trio at just 9.

Nevertheless, JD.com is still a force to be reckoned with in China. In the second quarter of this year, the company nearly doubled its profit, and management said in the earnings call that the company will continue its low-price strategy to compete with companies like Sam’s Club and PDD with better value for money.

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