The US retail giant has sold its stake in the Chinese e-commerce giant, ending an eight-year partnership, to focus on its China business.
Highlights:
- Walmart's sale of its JD.com stake comes as its China business booms as locals turn to Costco-style warehouse shopping.
- JD.com continues to face stiff competition in a tough e-commerce market amid sluggish domestic consumption in China.
Author: Xiao Lin
There are no permanent allies or enemies; allies change constantly, British statesman Henry John Temple famously said over a century ago: “Our interests are eternal and permanent, and it is our duty to pursue them.”
This perspective was echoed by U.S. retail giant Yahoo! News last week. Walmart (WMT.US) and JD.com Inc. It marks the end of a more than decade-long relationship with JD.US, 9618.HK, one of China's largest e-commerce companies.
Walmart sold its 9.4% stake in JD.com on Aug. 21, formalizing its divorce from its eight-year partnership. The timing of the divorce coincides with the end of an eight-year non-compete agreement between the two companies in China's giant e-commerce market.
“This decision allows us to focus on Walmart China and Sam's Club's strong China businesses and free up capital to pursue other priorities,” Walmart said after announcing the separation, adding that its strategic partnership with JD.com would continue. Walmart earned about $3.6 billion from the sale.
JD.com tried to cushion the blow of the divorce by saying it was confident about the future of the two companies' cooperation. On a more practical level, it used the remaining proceeds from a $3 billion share buyback plan it announced in March to buy back $390 million of its own stock.
Walmart continues to enter JD.com Dada (DADA.US) is JD.com's intra-city delivery service platform, in which Walmart held a 9% stake as of March 31.
But such a big sale, and the loss of a big-name partner, was bound to impact JD.com's stock price. Last Wednesday, the company's shares fell 9% in Hong Kong trading, to less than a third of their all-time high hit in February 2021. Meanwhile, Walmart's shares rose 0.6% to a record high of $75.58.
The split and the subsequent stock price reaction reflect investor concerns about JD.com's future, but it's also a small positive sign for Walmart as it tries to navigate China's vast but highly complex retail market.
Walmart first became interested in JD.com in 2010, when it sought to invest in the startup's C funding round, according to state media reports. At the time, Walmart had 189 stores in 101 cities across China. JD.com was already China's second-largest e-commerce platform, Alibaba's (BABA.US; 9988.HK) The hugely popular Taobao.
The investment never materialized, and there were market rumors that it was thwarted by Walmart's insistence on taking a controlling stake in JD.com, which the company's founder, Richard Liu, rejected. Walmart then acquired Chinese online grocer Yihaodian.com as a platform to expand its e-commerce footprint in China. Walmart subsequently increased its stake, eventually acquiring full ownership of the service in 2015.
Meanwhile, JD.com listed Walmart as one of its competitors when it went public in the U.S. in 2014, at a time when foreign investors were still enticed by the huge potential of China's e-commerce.
A perfect match?
The two former rivals quickly changed their tune, announcing a groundbreaking partnership in 2016. In the made-in-China deal, Walmart transferred Yihaodian to JD.com in exchange for a 5% stake in the company. Walmart gained access to JD.com's e-commerce infrastructure, while JD.com added more Walmart imports to its offerings, giving it an edge over Taobao.
At the time, JD.com was rapidly expanding into smaller markets in China. These markets were largely ignored due to their low spending power, but they contained hundreds of millions of consumers and offered huge business opportunities. JD.com's platform and logistics network were invaluable to Walmart, whose hundreds of brick-and-mortar stores faced e-commerce challenges. There were also rumors that Walmart's high hopes for a partnership with Yihaodian were running into conflicts.
The Walmart-JD.com partnership caused a stir, and the stock prices of both companies soared on the news. By the end of the year, Walmart had increased its stake in JD.com to 10%, and Walmart's sales on JD.com tripled within a year of the partnership.
A beautiful farewell
In the eight years since the merger, Walmart has built its own logistics and sales network in China, and more importantly, it has scaled back its traditional brick-and-mortar store network and shifted its focus to targeting cautious consumers who prefer value for money. Its Sam's Club brand has been riding the wave, even as China's consumer market has slumped since the pandemic.
In Hong Kong, people go to the neighboring city of Shenzhen to shop at Sam's Club and rival stores. Costco (CSCO.US) has become a popular day trip activity, and Sam's Club stores in other Chinese markets are frequently packed with bargain-hunting shoppers.
Walmart reported a 4.8% increase in revenue for the second quarter of this year, beating market expectations, and some of that increase could be attributed to China, where sales rose 17.7% to $4.6 billion despite a weak market, led by a 44% increase in local e-commerce sales.
“In China, strong membership trends and Sam's Club continue to drive double-digit sales growth, with approximately half of sales coming from digital,” Walmart CEO Doug McMillon said in the company's earnings call.
While Walmart is poised to go it alone in China, it's much less clear whether JD.com, which faces headwinds ranging from fierce competition to rising geopolitical tensions that are scaring global investors away from its U.S.- and Hong Kong-listed shares, is enjoying the divorce.
For years, JD.com has focused on building a platform known for high-quality electronics and its own logistics network that ensures timely delivery. But as competition has intensified, the company has diversified beyond its original direct sales model and added more small, third-party shops to its platform in an effort to compete better with Taobao. It has also experimented with low prices and subsidized pricing, aiming to compete not only with Taobao but also with other online stores. PDDD (PDD.US), and livestreaming e-commerce platforms such as Douyin.
JD.com has been following suit, trying to boost sales from live streaming, which is currently all the rage in China, but has had limited success so far. Meanwhile, PDD overtook JD.com to become China's second-largest e-commerce platform in 2019, and overtook Alibaba to become the country's largest e-commerce company by market capitalization at the end of last year. Reflecting current investor sentiment, Alibaba's price-to-earnings ratio is the highest of the three at 21x, compared with PDD's at 13x and JD.com's at the lowest at 9x.
That said, JD.com remains a force to be reckoned with in China: The company nearly doubled its profits in the second quarter of this year, and management said on its earnings call that it would continue its low-price strategy to compete with companies like Sam's Club and PDD by offering better value for money.
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