Resurging Walmart, Shaky JD.com Go Their Separate Ways In China

Key Takeaways:

• Walmart has sold its stake in JD.com at a time when its Chinese operations are flying on a growing local preference for Costco-style warehouse shopping
• JD.com continues to face stiff competition in China’s tough e-commerce market as consumption in the country remains sluggish

By Xiao Lin

There are no eternal allies or enemies, just a constant shifting of alliances, British statesman Henry John Temple said over a century ago when he famously proclaimed: “Our interests are eternal and perpetual, and those interests it is our duty to follow.”

Such perspective seems especially relevant in explaining last week’s breakup between U.S. retailing giant Walmart WMT and JD.com Inc. JD, one of China’s leading e-commerce companies, which ended their relationship with more than a decade of history.

On Aug. 21, Walmart formalized a divorce of sorts with its partner of eight years when it sold its 9.4% stake in JD.com. The timing of the separation coincides with the end of an eight-year non-compete agreement between the two in the massive Chinese e-commerce market.

“This decision allows us to focus on our strong China operations for Walmart China and Sam’s Club, and deploy capital toward other priorities,” Walmart said after announcing the separation, adding it would continue its strategic partnership with JD.com. Walmart received about $3.6 billion from the sale.

JD.com tried to soften the blow of the divorce by saying it has confidence in future collaboration between the two companies. On a more practical level, it also repurchased $390 million of its shares, using up the remaining amount under its $3 billion share buyback plan announced in March.

Walmart continues its presence on JD.com and Dada DADA, JD.com’s intracity delivery service platform in which Walmart still held a 9% stake as of March 31.

But the sale of such a big stake, not to mention the loss of such a big-name partner, was bound to have an impact on JD.com’s shares. The stock closed about 9% lower in Hong Kong last Wednesday to trade at less than a third of its all-time high in February 2021. Walmart’s shares moved in the other direction, rising 0.6% to hit an all-time high of $75.58.

The breakup and subsequent share reactions reflect investor concerns over JD.com’s future, while being a small positive sign for Walmart as it tries to find its way in the massive but also highly complex Chinese retail market.

Walmart’s interest in JD.com dates back as early as 2010, when it sought to invest in the up-and-coming company’s C funding round, according to a state media report. At that time, Walmart had 189 stores in 101 cities across China. JD.com was already China’s second-largest e-commerce platform, behind only Alibaba’s BABA hugely popular Taobao.

The investment didn’t materialize in the end, with market rumors saying it was killed by Walmart’s insistence on gaining a controlling stake in JD.com – something the company’s colorful founder Richard Liu refused. Walmart went on to buy Yihaodian.com, a Chinese online grocery store, to use as the foundation for growing its e-commerce footprint in China. It later increased its stake and finally took full ownership of that service in 2015.

Meantime, JD.com would go on to list Walmart as one of its competitors at the time of its U.S. IPO in 2014 when foreign investors were still enamored with the big potential of e-commerce in China.

Perfect Match?

The two former rivals quickly changed their tune with the announcement of their ground-breaking partnership in 2016. Under that made-in-China marriage, Walmart gave Yihaodian to JD.com in exchange for 5% of JD.com’s shares. While Walmart gained access to JD.com’s e-commerce infrastructure, JD.com added more imported goods from Walmart to its offerings, gaining an edge over Taobao.

At that time, JD.com was rapidly expanding into China’s smaller markets that were largely neglected because of their lower consumption power but whose hundreds of millions of consumers offered a huge business opportunity. JD.com’s platform and logistics networks were invaluable to Walmart, whose hundreds of brick-and-mortar stores were facing competition from the e-commerce challenge. Rumors also suggested that Walmart’s big hopes for its Yihaodian partnership were running into conflicts.

The Walmart-JD.com marriage got a strong reception, with both stocks rallying on the news. By the end of that year, Walmart had increased its JD.com stake to 10%, and Walmart’s sales on JD.com tripled one year into the partnership.

Clean Breakup

In the eight years following the marriage, Walmart has been building its own logistics and sales network in the country. More importantly, it has retrenched its traditional brick-and-mortar store network and has shifted its focus to target increasingly cautious consumers who are excited by good value-for-money. Its Sam’s Club brand has successfully tapped into that vein, defying the currently sluggish post-pandemic consumer market in China.

In Hong Kong, travel to the neighboring city of Shenzhen to shop at Sam’s Club and rival Costco COST has become a popular day trip activity. Sam’s Club stores in other Chinese markets are often frequently filled with bargain-hungry shoppers.

Walmart beat market expectations when it reported its revenue rose 4.8% in this year’s second quarter. Part of that upside may have come from China, where its sales defied the weak market to jump by 17.7% to $4.6 billion, led by a 44% jump in local e-commerce sales.

“In China, strong membership trends and Sam’s Club continue to drive double-digit sales growth, and about half of our sales there are digital,” Walmart CEO Doug McMillon said on the company’s earnings call.

While Walmart is ready to go solo in China, it’s far less clear if JD.com is enjoying the divorce as it faces multiple headwinds, from cutthroat competition to growing geopolitical tensions that are scaring global investors from its U.S.- and Hong Kong-listed shares.

For years JD.com was focused on building its platform, renowned for quality electronics and its own logistics network that guaranteed timely delivery. But as competition intensifies, it has also diversified beyond its original direct sales model and added more smaller third-party shops to its platform to better compete with Taobao. It is also experimenting with low prices and subsidies, aiming to compete not only with Taobao, but also PDD PDD, and livestreaming e-commerce platforms like Douyin.

JD.com has started to follow suit by trying to turn up its livestreaming sales that are all the rage in China now, but it has gained little traction so far. Meantime, PDD overtook JD.com in 2019 to become China’s second largest e-commerce platform, and late last year surpassed Alibaba to become the country’s most valuable e-commerce company by market value. Reflecting current investor sentiment, Alibaba now trades at the highest price-to-earnings ratio of 21 among the trio, while PDD comes next at 13 and JD.com is last among that trio at just 9.

All that said, JD.com is still a force to be reckoned with in China. It nearly doubled its profits in this year’s second quarter, and management said on its earnings call that the company will continue its low-price strategy as it tries to compete with the likes of Sam’s Club and PDD in offering better value for money.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.