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Wal-Mart's China revival strategy calls in JD.com and its drones
[SHANGHAI] Wal-Mart Stores Inc has hit the reset button on its China strategy in dramatic fashion.
The world's largest retailer is making an ambitious push into e-commerce in China and aims to deliver goods from its stores around the world to Chinese consumers within hours.
Shoppers in select remote villages could even see their Wal-Mart products being delivered by drones as part of a pilot project by its Chinese partner, JD.com Inc.
After unsuccessful efforts to scale up its own e-commerce network, Wal-Mart launched this week several new initiatives through a tie-up with JD - China's second-largest e-commerce website, with 300 million active users. With this partnership, Wal-Mart said it will now be able to deliver its goods, ranging from American vitamins to Japanese hand cream, to more than 90 per cent of China's 1.4 billion consumers.
"There isn't another country in the world that represents the kind of retail growth opportunity that China does, given the growth rate of the market itself and the consumer demand here," Chief Executive Officer Doug McMillon, 50, said in an interview in Beijing.
"We see opportunities to partner together to provide goods to our customers, to leverage our supply chain and their digital capabilities."
Wal-Mart has a lot riding on its new online strategy aimed at getting a bigger slice of the world's biggest e-commerce market. The retailer this month forecast that earnings will be flat the next two years while it invests in e-commerce. As it looks to China to fuel growth, cracking the Chinese online game will be more important than ever.
"They have found a clever way to leverage someone else's network to help them sell things online, and it's easier to jump on the back of JD.com," said Chan Wai-Chan, a senior partner at Oliver Wyman's Asia Pacific consumer practice.
Wal-Mart and its competitors in China are all suffering in sales lately because the e-commerce websites are taking away their business in everything except fresh foods, and this is Wal-Mart's solution, he said.
Wal-Mart shares have gained 12 per cent so far this year in New York trading, outperforming the Bloomberg World Retail Index, which is down 1.1 per cent. That still lags the US-listed stocks of its major e-commerce competitors, Amazon.com Inc and Alibaba Group Holding Ltd, which have gained 21 per cent and 28 per cent respectively over the period.
Mr McMillon, who has run the company since 2014, said that the initiatives will keep the company's China operations on track to contribute a quarter of its global retail growth in the next five years.
That's despite sluggish sales at Wal-Mart's retail stores in China while shoppers there increasingly turn to online websites for convenience. The strategy also gives it access to new Chinese consumers in smaller cities where Wal-Mart doesn't operate stores.
"The scale of the last mile here in China is unique - the economics related to it are different," said Mr McMillon.
"We could have built this ourselves, but everything requires investment. What we are doing is being very deliberate about where we're putting our resources and being open to working with others. In today's world, there's different ways to build that ecosystem that serves customers."
Wal-Mart operates 420 stores and Sam's Club membership outlets in the country. About 20 per cent of the retailer's sales in China are online, according to Ben Hassing, senior vice president for China e-commerce. Wal-Mart, which posted US$482 billion in annual sales, doesn't break out China revenue. Wal-Mart's global online sales are about US$14 billion, or 3 per cent of worldwide revenue, according to Bloomberg Intelligence.
The initiatives, which include guaranteed deliveries within two hours to customers who live within a few miles of 20 Wal-Mart stores initially, will also see the US retailer stock a JD.com warehouse with its products from around the world.
That means such things as dried cranberries from the US, toothpaste from Japan and face masks from Korea available at Wal-Mart's stores, will be available to Chinese consumers for the first time. The company will be able to offer tens of thousands of items from its Wal-Mart stores around the world to Chinese consumers within 18 months, said Mr Hassing.
JD, a retailer with an extensive logistics and delivery network, is delivering products to a limited number of remote villages in southern China by drones. Villagers who order Wal-Mart and Sam's Club products could see some goods flown to them, according to JD spokesman Josh Gartner.
The other twist: Sam's Club stores' upscale products are now available to all Chinese. A range of products from the membership store, which sells US$3,000 rice cookers and US$1,800 bottles of red wine, will be available for the first time to non-members online in China - at a 10 per cent price premium.
The retailer has struggled in China with multiple attempts to get a foothold in the market since its entry two decades ago. In 2007, it acquired Taiwanese chain Trust-Mart, though the company struggled to integrate it into its wider business. In the last few years, it's pulled back on an expansion as it closed stores in mostly second- and third-tier cities while opening new ones at a slower pace.
The new strategy follows Wal-Mart's decision to sell its Chinese e-commerce platform Yihaodian in June in exchange for a 5 per cent stake in JD. The retailer had acquired full ownership in the business a year earlier, and the sale was seen by analysts as a retreat from China's e-commerce market.
Instead, the Bentonville, Arkansas-based company has used the relationship with the Chinese partner to grab Chinese consumers online. Earlier this month, Wal-Mart boosted its stake in JD to about 11 per cent.
JD.com founder Richard Liu said that Wal-Mart's challenge with Yihaodian was that China's e-commerce landscape has two major players - Alibaba and JD.com - and not much room for the rest.
"I think Wal-Mart did have success with e-commerce, if not we would not give them so much shares when we acquired Yihaodian," he said in a separate interview.
Mr Liu said there is potential for the partnership to go global, especially with Wal-Mart's US$3.3 billion acquisition of US e-commerce start-up Jet.com in August.
"There's great potential for us to cooperate with Jet.com to develop e-commerce markets globally after we align our supply chains in China," he said.
To gain the upper hand in the retail battlefront, Mr McMillon says the company needs to be ready with an array of tools and platforms that serve customers.
"What we're seeing is that customers want it all: They want to save money, they want to save time, they want to have access to the merchandise they're looking for and sometimes be surprised by a new item," he said.
"They want to do that in stores. They want to do it on a mobile device. Some day they'll do it with a virtual reality experience. They'll get all of that."