Written by Dou Wenxue

Edited by Ziye

JD.com's stock price underwent a significant test even before it could fully enjoy the joy of exceeding performance expectations.

On August 21, JD.com issued an announcement regarding Walmart's sale of its equity stake. According to the announcement, as of August 20 (U.S. time), Walmart no longer held any equity stake in JD.com.

Previously, Walmart held a 9.4% stake in JD.com, making it the second-largest shareholder. This also means that Walmart has liquidated its entire equity stake in JD.com in one go.

Following this news, JD.com's Hong Kong-listed shares plunged at the opening on August 21. By the close of trading that day, the share price was at HK$102.4, down 8.73%, with a market value of HK$325.98 billion.

Image source: JD.com's official website

After the share price collapse, JD.com issued an urgent announcement during the lunch break on August 21, stating that the company would spend approximately US$390 million to repurchase shares. Furthermore, after the close on August 27, JD.com once again announced on the Hong Kong Stock Exchange that its board of directors had approved a new share repurchase plan, allowing the company to repurchase shares worth up to US$5 billion (including American Depositary Shares) over the next 36 months ending in August 2027.

The partnership between JD.com and Walmart began in 2016, eight years ago, at a crucial juncture in China's physical retail landscape.

At that time, JD.com officially announced that Walmart would acquire approximately 5% of JD.com's total issued share capital and unveiled a series of sincere cooperation strategies. Walmart sold its Yihaodian shares to JD.com, and JD.com leveraged its e-commerce platform and logistics advantages to empower Walmart.

This collaboration was once regarded as a perfect match in the industry, with some Walmart employees even suggesting that after JD.com + Yonghui + Walmart, there would be no rising stars in the retail sector.

The partnership initially boosted JD.com's share price in the short term, but further in-depth cooperation did not continue after Walmart stopped continuously investing in JD.com.

Today, Walmart's Sam's Club no longer relies on its flagship store on JD.com; JD.com continues to expand its physical retail presence, but Walmart's influence is rarely seen behind the scenes.

It can be said that neither JD.com nor Walmart relies heavily on each other anymore. Therefore, despite changes in equity investments, the impact on their respective businesses will not be significant. JD.com has also stated that these equity investment changes will not affect any business-level cooperation between the two parties.

However, with neither party needing the other as much, future cooperation may not go too deeply.

1. The Joint Venture Eight Years Ago: Walmart and JD.com Facing Pressures, Seeking Mutual Warmth

In 2011, Walmart first approached JD.com with an investment offer, which was rejected.

At that time, Walmart was already a retail giant topping the Fortune 500 list in the U.S., while JD.com was just beginning its transformation into a comprehensive online retailer. During negotiations, Walmart proposed acquiring JD.com with the aim of becoming the controlling shareholder, a request that JD.com could not accept.

Five years later, in 2016, JD.com officially announced that it had received strategic investment from Walmart. Walmart acquired 145 million newly issued Class A ordinary shares of JD.com, representing approximately 5% of the total issued share capital.

Scene of JD.com and Walmart's strategic cooperation announcement, image source: National Business Daily's official WeChat public account

After the completion of the cooperation, JD.com acquired the main assets of Yihaodian, including its brand, website, and app, and fully supported Yihaodian's continued operation with its existing brand and unique market positioning. Walmart continued to operate Yihaodian's self-operated business and provided consumers with a wider range of products leveraging its global supply chain.

In addition, the two parties expanded their cooperation in logistics, platforms, and supply chains. For example, "Sam's Club" opened an official flagship store on the JD.com platform, used JD.com's integrated warehouse and distribution logistics services, and connected Walmart's physical stores in China to JD.com's "Dada" and O2O e-commerce platform "JD Daojia."

Behind this cooperation, both JD.com and Walmart, each with their strengths, faced considerable pressures at the time.

While JD.com had established its advantage through "genuine products" and "logistics," its years of unprofitability remained a source of anxiety. According to its annual reports from 2015 to 2018, JD.com's net profits were all negative.

During this period, JD.com continuously explored other more profitable businesses. For example, in June 2017, it spun off JD Finance, which was performing better and attracting more capital attention. The topic of "When will JD Finance IPO?" immediately became a prevalent discussion in the industry. According to Securities Times reports at the time, most industry insiders believed that JD Finance was valued at over RMB 100 billion.

Furthermore, JD.com was eager to break through in daily necessities and fresh produce categories. According to 36Kr reports, JD.com was continually expanding its channels, making strategic investments (e.g., in Yonghui and Tiantianguo), and building its fresh produce supply chain.

More importantly, around 2018, China's physical retail market entered a crucial development phase. According to a market consumption report released by China's Ministry of Commerce, during the 2018 Spring Festival, China's retail and catering consumption reached approximately RMB 926 billion, up 10.2% year-on-year. In other words, during the seven-day Golden Week, people spent over RMB 900 billion on shopping and dining alone.

As competitors were laying out their physical retail strategies, JD.com was also eager to join in. Catching Walmart, a benchmark enterprise in physical retail, was an opportunity for JD.com to address its shortcomings in physical retail.

Looking at Walmart, it had always aspired to tell its own hypermarket story in China.

Since 1995, when French retail giant Carrefour entered the Chinese market, Walmart followed suit the following year. According to previous reports from the 21st Century Business Herald, Walmart's development plan in China in 2016 could still be summarized as accelerated expansion.

According to its plans that year, Walmart aimed to open 30 new stores, upgrade 60 existing stores, launch its first shopping mall, expand logistics and distribution centers, introduce cross-border e-commerce services, upgrade co-branded credit cards, and establish a retail university in China.

However, Walmart had long been aware of its gap with domestic e-commerce giants in online operations. Under the impact of China's e-commerce, Walmart's offline supermarket revenue continued to decline, and its online supermarket Yihaodian, which it had invested in for years, also suffered losses.

According to reports from LatePost, Walmart, which had entered China for 20 years, only had 15 Sam's Club stores in the country at the time, and the company's headquarters even considered abandoning the membership warehouse model in China.

Ultimately, Walmart chose to partner with JD.com, a move hailed as a "perfect match" in the retail industry. From the perspective of both parties' circumstances and cooperation details, this collaboration benefited both JD.com and Walmart.

For JD.com, acquiring Yihaodian, an e-commerce platform focused on daily necessities and fresh produce, effectively addressed its shortcomings in these two categories.

For Walmart, the partnership provided new logistical support, enabling it to leverage JD.com's platform and logistics network to expand Sam's Club's business nationwide while also telling e-commerce and O2O stories.

In the subsequent years, Walmart further increased its stake in JD.com. According to 36Kr reports, as of December 31, 2016, Walmart held a total of 2.385 billion Class A ordinary shares of JD.com, representing 12.1% of JD.com's total Class A ordinary shares, and 2.857 billion Class A and Class B ordinary shares, accounting for 10.1% of JD.com's total equity.

JD.com's financing history, image source: QCC

The two parties also engaged in some collaborative efforts. For example, in 2017, they reached a "three connections" cooperation, connecting online and offline user groups, mutually infiltrating online and offline stores, and sharing some inventory. In 2018, this cooperation was upgraded, and inventory sharing was rolled out nationwide.

However, as time passed, the once-perfect match eight years ago has evolved to a point where neither party relies heavily on the other, instead focusing on their respective priorities.

2. Why Did Walmart Choose to End the Partnership First?

The partnership was initiated by Walmart and ultimately terminated by them as well.

Regarding Walmart's decision to sell its JD.com shares, China Economic Net reported that investors close to the transaction analyzed that the move was likely driven by Walmart's need to alleviate financial pressures.

The investor explained that as Walmart's revenue growth slowed in the second quarter, its cash flow decreased while it needed to diversify its strategies to adapt to the changing market environment. Exiting its equity investment in JD.com was a normal capital operation to release resources and optimize capital allocation, without affecting the strategic partnership between the two parties.

As of the end of the second quarter of 2024, Walmart's cash and cash equivalents stood at RMB 8.879 billion, down 36.45% year-on-year.

Walmart's interim financial report for 2024, image source: Choice

Selling JD.com shares will also bring a significant amount of capital to Walmart. According to a filing submitted to the U.S. Securities and Exchange Commission, Walmart plans to sell all its JD.com shares at a price range of US$24.85 to US$25.85 per share. At the upper end of this range, Walmart stands to raise US$3.74 billion.

Walmart currently has many funding needs.

From a store layout perspective, Walmart has frequently closed and downsized its traditional hypermarket business in recent years while opening more Sam's Club stores.

According to incomplete statistics, Walmart closed 21 stores in 2022, 26 in 2023, and another 12 in the first half of this year. This means that in the past two and a half years, Walmart has closed nearly 60 hypermarkets in the Chinese market.

In contrast, Sam's Club currently has 48 stores in China, with total revenue exceeding RMB 80 billion last year.

Image source: Walmart China's official website

Additionally, there is a mutual driving effect between Sam's Club and e-commerce business, and Walmart has once again seen the potential for growth in e-commerce.

According to Walmart's financial report for the second quarter of 2024, Sam's Club's sales also achieved double-digit year-on-year growth, driving Walmart China's net sales in the second quarter to US$4.6 billion, up 17.7% year-on-year. Walmart executives also stated during the earnings call that half of Sam's Club's sales came from online consumption, with hourly delivery e-commerce orders increasing 28% year-on-year to 59 million.

Furthermore, according to Tencent Tech, data showed 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. Walmart China's e-commerce penetration rate reached 49%, an increase of over 200 basis points from the same period last year.

In the second quarter of this year, both online traffic and order volume grew alongside offline physical stores, with global e-commerce sales growing strongly by 21% year-on-year.

The financial report also indicated that although Walmart's e-commerce business has not yet achieved profitability, its losses were narrowing due to a significant reduction in order delivery costs.

While Sam's Club theoretically has considerable room for growth, tapping into the domestic market is not straightforward. Amid declining consumer spending, Sam's Club, which targets the middle class, faces challenges from "budget alternatives."

According to Spicy, in 2023, 1688 Selected launched a "Sam's Club Alternative" channel. For example, an Aux air purifier priced at RMB 690 at Sam's Club was available for RMB 69 on 1688 Selected, a discount of up to 90%. A 24-bone automatic umbrella priced at RMB 42.75 at Sam's Club cost only RMB 8.55 on 1688 Selected, with monthly sales exceeding 20,000 units.

Sam's Club is also willing to "lower its stance" and compete on price with other retailers. According to LatePost, Sam's Club often sells products at lower prices than JD.com and Tmall.

Simultaneously, Sam's Club has begun expanding into new first-tier or second-tier cities. According to an official announcement on June 13, new stores will open in Dongguan, Shaoxing, Chengdu, Quanzhou, and two other locations.

On the one hand, Walmart urgently needs funds for expansion, and on the other hand, the story after the JD.com partnership has not been as compelling as anticipated.

Over the years, the cooperation between the two parties has not been in-depth, with JD.com more resembling an online distribution channel for Walmart. At present, Walmart prefers to use its funds for expansion.

3. JD.com is Still Betting on Physical Retail but Doesn't Rely as Much on Walmart

Walmart's liquidation of its stake initially impacted JD.com's share price.

On August 21, JD.com's Hong Kong-listed shares plummeted, closing the day down 8.73% at HK$102.4 per share, with a market value of HK$325.98 billion.

JD.com was aware that this stake reduction would cause share price volatility, so it issued an announcement during the lunch break on August 21, stating that the company would spend approximately US$390 million to repurchase its shares and had fully utilized the US$3 billion share repurchase program approved in March 2024.

Subsequently, on August 22, JD.com's share price recovered somewhat, closing at HK$96.75 per share, up 3.48%.

After the close on August 27, JD.com announced a new share repurchase plan, allowing the company to repurchase shares worth up to US$5 billion (approximately RMB 35.6 billion, including American Depositary Shares) over the next 36 months ending in August 2027. The plan will take effect from September 2024.

Image source: JD.com's official WeChat public account

Some analysts believe that Walmart's stake reduction will not significantly impact JD.com.

According to China Securities Journal, when JD.com and Walmart entered into their partnership, they had agreed to an eight-year non-compete arrangement, which has now expired.

JPMorgan Chase also noted that Walmart's departure would not fundamentally alter JD.com's business outlook since JD.com does not heavily rely on Walmart.

Prior to this incident, JD.com had just delivered impressive financial results.

According to JD.com's financial report for the second quarter of 2024, the company's revenue reached RMB 291.4 billion, with a net profit attributable to ordinary shareholders of the listed company under non-GAAP of RMB 14.5 billion, up 69% year-on-year, and a net profit margin of 5.0% for the first time, significantly exceeding market expectations.

From the perspective of the impact on business cooperation, according to Caijing News, a person close to JD.com revealed that changes in equity investment will not affect cooperation at any business level between the two parties. They remain important strategic partners for each other, and both parties are willing to continue to maintain close business cooperation to expand domestic and international market operations.

For JD.com, the online + physical retail strategy seems unlikely to change easily due to the loss of an ally. As can be seen from JD.com's actions in recent years, although the offline retail layout of large factories has entered the second half, JD.com has not given up on its offline retail layout.

Source: JD.com's official WeChat public account

In September 2022, JD.com Supermarket announced its omnichannel business data, showing that JD.com Supermarket, in collaboration with JD.com Hourly Shopping, has covered over 87,000 supermarket-type physical stores and more than 29,000 supermarket FMCG brands, providing instant consumption services to consumers in over 400 cities nationwide.

In 2023, JD.com's offline retail sector developed rapidly, with JD.com MALLs successively opened in Dongguan, Kunming, Wuhan, Ningbo, and other locations. According to data from the New Retail Lounge, 11 JD.com MALLs had opened by May of this year.

In June of the same year, JD.com established the Innovative Retail Department, integrating businesses such as 7FRESH and Jingxi Pinpin into an independent unit. From July 27th, Jingxi Pinpin officially changed its name to JD.com Pinpin.

The relaunch of 7FRESH and JD.com Pinpin also signifies JD.com's continued in-depth layout in offline retail operations.

This year, in April, JD.com's first discount supermarket, Huaguan Discount Supermarket, opened in Beijing; in May, JD.com MALL's first first-tier city store entered soft opening and officially opened in June.

According to Time Finance, in 2023, JD.com MALLs in cities such as Dongguan, Kunming, and Ningbo secured the top market share among local chain stores in the year of their opening. "In 2024, JD.com will continue to accelerate the layout of its offline retail sector, creating more omnichannel retail formats," the company stated.

JD.com remains interested in physical retail, while Walmart may be more focused on building its e-commerce platform. Their diverging future plans may be a significant reason for their 'breakup'.

For JD.com, the company's exploration of physical retail operations continues, and it will not abandon the trend of instant retail. Having bid farewell to its old partner with different directions, JD.com seeks new cooperation partners to continue its story.

(The featured image of this article is sourced from Walmart China's official website and JD.com's official WeChat public account.)