E-commerce Is Becoming The Achilles Heel For Wal-Mart

  • Walmart has raised the white flag with respect to its e-commerce aspirations in China having disposed of Yihaodian.
  • Nevertheless many synergies should come out of the JD.com alliance. Walmart's logistics and supply chain structure should improve.
  • More focus is needed for its e-commerce business in the US. It needs to return to double digit growth rates.

Sometimes in business, you have to succumb to market conditions and just decide to walk away or change your plan of attack. There is no point in consistently trying to make an impact in a market because ultimately the balance sheet (and shareholders) are going to suffer. This is why I see Walmart's (NYSE:WMT) new alliance with JD.com  becoming successful in the long run, because it will mean that JD.com can concentrate on what it is good at (improves its presence in important product categories online) and Walmart can focus on building sales in its offline stores (which has been the hall-mark of this company since day one).

Some analysts have stated that this new deal is an act of resignation regarding its online aspirations in China but I don't see it this way. Yes, the sale of Yihaodian to JD.com will reduce its risk (and potential reward in China some may say) with regards to e-commerce sales, but Walmart has come out of this deal with some distinct advantages.

Also read: Wal-Mart Plans To Challenge Amazon By Becoming More Like Amazon

Firstly, just look at the amount of distribution hubs JD.com has compared to Yihaodian.com (6000 compared to 250). Walmart knows that through these 6000 hubs, Yihaodian can grow much quicker with JD.com at the helm which is why it went the "5% stake" route instead of an all cash deal. Walmart knows that the e-commerce trend will only go from strength to strength in China which is why it still wants to have a presence. JD.com currently has 150 million users which gives Walmart new blood to market to. Furthermore the tie-up means that Walmart will also gain access to JD.com's logistics network which is key in my opinion for unlocking cost synergies in China going forward. Finally "Sam's Club China" will be allocated a storefront on JD.com which is bound to increase sales on such a high traffic web portal.

So will the 5% stake (or around $1.5 billion if the stake was converted to cash) turn out to be good investment for Walmart in the long run? Well, EPS is immediately predicted to rise by around $0.17 in the second quarter of this year but ultimately this alliance is a statement to Alibaba - one which says that competition wont take it lying down. Alibaba had their investor day recently and projected a 48% increase in revenue for fiscal 2017. This metric alone shows the huge potential of the Chinese e-commerce market. Walmart shareholders will be hoping that meaningful cost synergies can come out of its new alliance, which would give way to more market share being eventually taken away from the likes of Alibaba.

Astute investors will now be turning their attention to Walmart's e-commerce growth in its home market to see if the retailer can resurrect its growth rates which have been slowing as of late. Walmart only grew its e-commerce division by 7% last quarter (see chart) which was disappointing especially when you compare it to key competitor - Target (NYSE:TGT) which grew its online sales by 23%.

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Despite Walmart producing a good first quarter (relative to other retailers), the trend above is worrying especially considering the investment the company has made in this area as of late. Customers need full transparency when using Walmart's web portals. It just doesn't seem to be there right now. Furthermore, according to me, Walmart needs to be very careful in how they roll out this service going forward. Adding new products too hastily in one way is risky as this would equate to more resources being needed over time. Amazon's "Fresh" and Kroger's "Clicklist" are huge competitors in this space. Walmart's strategy with e-commerce is to drive the customer into its stores. I agree with this strategy as curbside collection services have far less competition than delivery options. It must deliver or competitors will quickly take valuable market share. Watch this space.

To sum up, I believe the newly formed Chinese alliance with JD.com should turn out to be successful in the long run. Nevertheless, the offloading of the Yihaodian business is also indicative of what could happen in the US. Walmart must re-ignite growth in its e-commerce division in the US or competitors will gladly steal their lunch. Huge investments have been ploughed into e-commerce so far. Its not good enough to see competitors growing and the economy wide rate of 15% to be so much higher than Walmart's 7%. We shall see what the second quarter brings.

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