Wal-Mart has increased its stake in China's second-largest e-commerce retailer to 10.8% as a way to strengthen its presence in the country after continuously failing to succeed on its own.
China has been the world's toughest retail market to crack for foreign retail giants and Wal-Mart (XETRA: Wal-Mart Stores [WMT]) is not an exception. The company had to sell its Chinese business back in June in exchange for a stake in JD.com (LSE: JD Sports Fashion [JD]), the second-largest e-commerce player on the country's market as well as Alibaba's (NYSE: Alibaba Group Holding [BABA]) main rival. The American retailer has swapped its Yihaodian online platform for a 5.9% stake in JD.com.
It seems that Wal-Mart is satisfied with how things have been going since the end of June and has decided to buy an additional 5% stake to grow its presence in the company. Apart from being the toughest market, China is also the world's largest retail market, surpassing the second-biggest American market by roughly $250 billion. No wonder foreign retail players are so determined to win at least a part of it.
"The reality is that e-commerce is hyper-competitive in China and it is tough for any platform to make money. Selling up in return for a 5 percent stake in JD.com is a good way of staying in the space while reducing the risk," an analyst Ben Cavender told Reuters in June.
By collaborating with JD.com, Wal-Mart got an access to the company's advanced logistics networks and over 150 million customers, what would be unattainable for Wal-Mart on its own. JD.com employs a similar business model to that of Amazon (NASDAQ: Amazon.com [AMZN]) by selling goods directly to consumers from its own inventory and relying on the quick delivery to retain customers.
Yet, selling Yihaodian in exchange for a small stake in JD.com has taken away a significant part of Wal-Mart's decision-making power, as the company currently remains a "passive investor" with a limited control over JD.com's business.
“The stepped-up investment in JD has been part of our plan, as we continue to be a passive investor. We believe this strategic alliance will help us grow e-commerce even faster in China,” Wal-Mart's spokesperson told the WSJ.
According to the company's CEO Doug McMillon, Wal-Mart will continue focusing on expanding in China as Macmillan believes that the country will be the main driver of the global retail growth in the upcoming years. JD.com has been demonstrating some healthy growth rates in the last year, with its revenue growth exceeding that of Alibaba for 7 quarters straight. However, the part of the business that Wal-Mart is mostly interested in, online sales directly to consumers, is still performing worse than Alibaba's. JD.com's market share of 23% is still far behind Alibaba's 58% of the market, reports the Wall Street Journal.
Anyway, it seems that Wal-Mart has joined a strong alliance against Alibaba as JD.com is also supported by China's giant Tencent (NASDAQ: TCEHY) that owns 20% of the company. The two giants have almost equal market caps of $263 billion for Tencent and $267 for Alibaba. For the messenger Tencent, JD.com can be a tool to play against Alibaba on the retail market and heat up the competition between the rivals.
Following the announcement of the deal, JD.com's stock jumped almost 7% in yesterday's after-hours trading.