When the world’s largest retailer makes a move, other retailers pay attention. Wal-Mart Stores Inc.’s decision to enter into a strategic alliance with the second largest Chinese e-commerce retailer, JD.com Inc., may inspire others to seek out local partnerships to make inroads in this major market.
“For some in the industry, this will be a ‘Good Housekeeping’ seal of approval,” said Christian Magoon, chief executive officer of Amplify Investments, which recently launched the Amplify Online Retail ETF IBUY, -0.52% .
“If Wal-Mart is comfortable and, with their scale, couldn’t crack the Chinese market on their own, it will be a case study for others. It could be a bellwether moment to see if this strategic partnership is the best model.”
Wal-Mart announced Monday that it will sell its Yihaodian website to JD.com and receive about 5% of the company’s total shares outstanding. Wal-Mart WMT, +0.51% will open a flagship Sam’s Club China store on JD.com JD, +0.33% and leverage the online retailer’s supply chain assets.
Wal-Mart has had problems growing in the Chinese market, amid food regulatory and food safety controversies.
“Wal-Mart was trying to go on its own and I think this is kind of a throwing in the towel,” Magoon said. At the same time, it is an acknowledgment that Wal-Mart needs to grow in China to be in a good position for the future. “If Wal-Mart is going to compete, they’re going to have to go big,” Magoon said.
To compete in China, retailers have to go online, said Charlie O’Shea, Moody’s lead retail analyst.
“JD.com has a solid platform online in China, and we know China’s online business is expanding rapidly because they’re not at the level of brick-and-mortar like the U.S.,” said O’Shea.
JD.com also has a proprietary system that allows them to control the “last mile” with customers, or the final leg of the delivery process that gets merchandise into the buyer’s hands. O’Shea describes the last mile as “critical.”
Analysts at UBS view the deal as a “good move on many levels,” though Wal-Mart’s share price may not reflect that.
“While this deal isn’t a needle mover for Wal-Mart shares, it shows the retailer can be shrewd when the opportunity presents itself,” the bank wrote in a Monday note.
UBS believes there are more opportunities like this one in the retailer’s portfolio, which currently spans 28 countries.
“Wal-Mart has identified China as its highest potential international growth market,” they wrote. “We believe it remains fully committed to this geography, despite the sale.”
UBS rates Wal-Mart stock at neutral with a price target of $67.
Wal-Mart shares were up 0.4% in Tuesday trading, and up 16.5% for the year so far. JD.com shares are down 0.4% in Tuesday trading, and down 35% for the year so far. The S&P 500 is up 2.1% for the year to date.