Walmart sells off its stake in JD.com in a "fire sale".

According to the latest regulatory filings submitted by Walmart, the company has completed the sale of all its shares in JD.com, valued at approximately $3.7 billion. Prior to the sale, Walmart held a 9.4% stake in JD.com, making it the second-largest shareholder after Liu Qiangdong. Following the disclosure of this transaction, JD.com's Hong Kong and U.S. stocks plummeted by approximately 10%.

Subsequently, JD.com quickly announced a $390 million share repurchase plan, but its impact on boosting investor confidence was limited. This is due to the pressure on JD.com's core business from intense competition in the e-commerce sector. Strategically, as competitors like Taobao and Douyin adjust their low-price strategies to achieve steady growth, JD.com's continued pursuit of a low-price strategy has raised questions about its long-term profitability.

According to JD.com's latest second-quarter financial report, revenue increased by only 1.2% year-on-year, significantly lower than the national online retail sales growth rate of 11%. This was primarily due to a 4.6% year-on-year decline in revenue from electronics and household appliances, which offset an 8.7% increase in revenue from daily necessities, dragging down overall performance.

JD.com's CFO Dan Su explained during the earnings call that the slowdown in revenue growth in the second quarter was due to short-term factors related to high baselines for summer products like air conditioners. The improvement in profit margins was mainly driven by increased supply chain efficiency, resulting in a significant year-on-year improvement in gross margin. In simple terms, it can be summarized as four words: cost reduction and efficiency enhancement. This explains how JD.com was able to achieve a record-high net profit of RMB 12.6 billion despite hitting an all-time low revenue growth rate.

"Fire sale" of JD.com

Objectively speaking, JD.com has not underperformed the market. Consumer weakness in the second quarter of this year made it difficult for major e-commerce platforms to achieve explosive growth through price wars. Regarding this financial report, a Morgan Stanley report noted that JD.com's year-on-year revenue growth rate of just 1.2% should raise market concerns. The report predicted that JD.com's revenue growth would not significantly recover in the second half of the year.

Looking back at the entire year 2023, JD.com's quarterly revenue growth rates were 1.4%, 7.6%, 1.7%, and 3.6%, respectively. It is difficult to argue that Walmart's decision to sell off its stake in JD.com was not influenced by JD.com's growth struggles. However, investment analysts believe that this transaction may be Walmart's capital allocation strategy to alleviate its own financial pressures, rather than a reflection of changes in its strategic partnership with JD.com.

This view has been officially confirmed by both Walmart and JD.com. Sources close to JD.com revealed to the media that the eight-year cooperation between the two parties has yielded remarkable results, serving as a model of mutually beneficial cooperation: Walmart has completed its e-commerce layout in China, while JD.com has expanded its global supply chain capabilities.

This actually reveals another fact about Walmart's "fire sale" of JD.com: Walmart's dependence on JD.com has been decreasing. Furthermore, Walmart is proving through Sam's Club that its business goals in the Chinese market no longer require holding a stake in JD.com.

Looking back at the cooperation between Walmart and JD.com, it can be seen as a microcosm of China's retail development over the past three decades. As the world's largest retailer, Walmart entered the Chinese market in 1996 and opened its first Walmart Supercenter and Sam's Club in Shenzhen that year. At the time, the head of Walmart China stated that the company's future development would focus on the integrated development of online and offline channels.

This foreshadowed the subsequent partnership between Walmart and JD.com. At the end of 2010, JD.com announced that six companies, including Walmart, had agreed to invest $500 million in JD Mall, with Walmart playing a role as a "strategic investor." However, during JD Mall's Series C funding round the following year, Walmart attempted to take control of JD.com, which was rejected by Liu Qiangdong. This led to nearly five years of strained relations between the two parties.

These five years were also the fastest-growing period for China's e-commerce industry, with an increasingly significant impact on physical retail. To better understand the Chinese e-commerce market, Walmart shifted its focus from JD Mall to Yihaodian, investing in the latter as early as 2012 and acquiring full control in 2015. However, Walmart's management of Yihaodian remained unprofitable. Data showed that Yihaodian's market sales reached RMB 11.54 billion in 2013, but its market share among e-commerce sites had dwindled to just 1.5% by June 2015.

The trend towards "new retail" emerged in 2014. That year, Alibaba decided to invest in Intime Department Store. In Jack Ma's view at the time, the era of pure e-commerce would soon end, and the era of new retail had arrived.

Over the next four years, Alibaba invested RMB 75 billion in offline retail through equity acquisitions, mergers, and other capital operations, deeply penetrating offline retail sectors such as fresh food, general merchandise, and supermarkets. Giants like Tencent, JD.com, and Suning also moved quickly, with JD.com investing in Yonghui Superstores and BBK, and opening stores like 7FRESH and JD.com Mini.

A crucial turning point was in 2016, when Jack Ma first proposed the "Five New" strategies at the Yunqi Conference: new retail, new finance, new manufacturing, new technology, and new energy, with new retail being the top priority. He believed that the development of these "Five New" strategies over the next 30 years would profoundly impact China, the world, and everyone's future. His ultimate goal was to recreate an Alibaba offline.

It was also in March of that year that Alibaba proudly announced that it had surpassed Walmart to become the world's largest retailer, with an annual transaction volume of RMB 3 trillion.

Sam's Club is the confidence

This trend influenced all e-commerce and retail practitioners, who began implementing similar concepts. For example, Suning introduced "Smart Retail," while Liu Qiangdong proposed the fourth retail revolution and the concept of "Boundaryless Retail."

It is worth mentioning that in April 2015, Liu Qiangdong wrote in the preface to "Sam Walton: Made in America," "How can one engage in retail without reading about Walmart?" He concluded the preface by praising, "The secrets of retail are all on Walmart's shelves."

Seeing the potential for renewed cooperation, Walmart and JD.com quickly entered a "honeymoon period." In June 2016, they reached a series of in-depth strategic partnerships. Under the agreement, JD.com transferred 5% of its equity for $1.5 billion, in exchange for Walmart's strategic cooperation and most of Yihaodian's assets.

This mirrored Tencent's investment in JD.com, where Tencent bundled its e-commerce assets like Yixun and Paipai with JD.com and provided traffic support on WeChat in exchange for a 20% stake in JD.com.

The cooperation between Walmart and JD.com was widely praised at the time, with some analysts suggesting that JD.com could leverage Walmart's resources to expedite its global expansion, strengthen its supply chain, and enhance its price competitiveness. The two companies also cooperated in O2O supermarkets and had capital demands to strengthen their cash flow capabilities.

In the early stages of cooperation, both parties demonstrated their sincerity and determination through concrete actions. For example, in 2017, Walmart and JD.com first achieved inventory, user, and store interconnectivity ("three interconnections") and jointly held the large-scale promotional event "88 Shopping Festival." In 2018, they upgraded the "three interconnections" strategy to "three interconnections 2.0," deepening supply chain cooperation by fully integrating online and offline channels.

During this period, Walmart also participated in several strategic financings of JD.com's subsidiaries. For example, in 2018, Walmart increased its investment in Dada-JD Daojia by approximately $320 million.

However, progress stalled in the later stages of this "honeymoon period," with Walmart tending to view its cooperation with JD.com more as a "financial investment." On the one hand, the Chinese retail market underwent significant changes, and the narrative of new retail faced challenges. For example, the founder of Hema retired amidst rumors of a potential sale, while Intime, Sun Art Retail, and Hema were all rumored to be up for sale. In February, Joe Tsai stated during an earnings call that it was reasonable for Alibaba to exit traditional offline retail businesses, it was just a matter of time.

Meanwhile, JD.com and Meituan were also adjusting their new retail strategies. For instance, JD.com temporarily halted the expansion of its 7FRESH stores and focused more on physical retail, while Meituan gradually closed its Xiaoxiang supermarkets and became more focused on online instant delivery.

On the other hand, Walmart was adjusting its business strategy in the Chinese market, gradually shifting its focus from hypermarkets to warehouse club-style Sam's Clubs, creating direct competition with JD.com in certain areas. According to incomplete statistics, Walmart has closed nearly 60 hypermarkets in China over the past two and a half years, instead opening or renovating Sam's Club locations.

Data shows that Sam's Club currently has 48 stores in China, with total revenue exceeding RMB 80 billion last year. Retail experts estimate that Sam's Club's compound annual growth rate in sales over the past three years has been no less than 30%, exceeding RMB 80 billion in 2023. With each customer contributing an average annual revenue of RMB 14,000, this is 1.6 times that of Taobao and nearly five times that of Pinduoduo. In the second quarter of this year, Sam's Club's sales grew by double digits year-on-year, driving a 17.7% year-on-year increase in Walmart China's net sales to $4.6 billion.

Amid this stark contrast, thanks to JD.com's capabilities in e-commerce and logistics, Sam's Club, backed by Walmart's robust global supply chain and product capabilities, has expanded rapidly in the Chinese market. Data shows that Sam's Club's online sales in China increased by 29% year-on-year in the first half of 2024, accounting for approximately 50% of total sales, while the penetration rate of Walmart China's e-commerce has reached 48%.

Clearly, Sam's Club has become Walmart's core competency in winning the Chinese market, making JD.com's position less critical. In other words, Sam's Club is the greatest source of confidence for Walmart in its decision to sell off its stake in JD.com. For instance, some argue that without holding JD.com shares, Walmart can focus more on expanding its stores in China and is confident that its Chinese operations are strong enough to compete independently in the fiercely competitive retail market.

For JD.com, as it continues to strengthen its offline retail presence, it will face increasing competition from Walmart-Sam's Club. Addressing the pressure from Sam's Club will also be a challenge for other platforms with retail operations.

References:

International Finance News, "Breakup Fee Reaches US$3.74 Billion, JD.com Loses Another Ally"

36Kr, "Eight Years of the New Retail Dream, and the Winner is Sam's Club"

Tencent News In-Depth, "Behind Walmart's Stake Reduction in JD.com: Online Goes Online, Offline Goes Offline"

I am Tang Chen, focusing on internet technology and business stories. Original content, unauthorized reproduction is prohibited.