Bottom line: Wal-Mart’s Yihaodian could sharply boost its share of China’s e-commerce market in the next 2-3 years, following a buyout that will give the site better access to its parent’s experience, offline stores and global connections.
Just a week after sacking the 2 founders and top executives of its China e-commerce site, global retailing giant Wal-Mart (NYSE:WMT) has taken the next step and bought out its partners in their Yihaodian joint venture. The buyout completes a takeover that began with Wal-Mart’s purchase of a controlling 51 percent of Yihaodian 3 years ago. It also signals that Wal-Mart is preparing to pump major new investment into the site, as it tries to become a major player in a market dominated by local giants Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD).
I have to applaud Wal-Mart for finally taking control and tossing out Yihaodian’s founders, who weren’t doing much to challenge any of the nation’s top e-commerce sites. But that said, foreign companies have a very poor track record competing with homegrown Chinese Internet firms, and it's far from clear if Wal-Mart can succeed where other big names like Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Yahoo (Nasdaq: YHOO), Expedia (Nasdaq: EXPE) and eBay (Nasdaq: EBAY) have failed in the past.
Yihaodian looked like a rising e-commerce star when Wal-Mart took control of the company by buying its 51 percent stake in 2012. It tried to carve out niches in the online grocery space and the market for imported goods, drawing on some of its own connections and areas of expertise. But despite those efforts, Yihaodian remains a bit player in the broader China e-commerce market with less than 1 percent share.
Wal-Mart was clearly running out of patience with Yihaodian founders Yu Gang and Liu Junjun, who were also the chairman and CEO when they suddenly resigned less than 2 weeks ago. (previous post) Now Wal-Mart is saying it has officially taken full control of Yihaodian by buying out the remaining 49 percent of the company from Yu, Liu and another major stakeholder. (company announcement; Chinese article)
Wal-Mart also announced that Wang Lu would take over as head of Yihaodian as part of his broader responsibilities as its Asia head of e-commerce. No terms were given for the buyout, but I would expect Wal-Mart paid around $200-$250 million, which is roughly half the market value of Dangdang (NYSE:DANG), a company of similar size that is also struggling.
Accelerating Investment, Offline Integration Ahead
Wal-Mart didn’t comment in detail on its future plans, but said it will invest in accelerating e-commerce in China and also in integrating Yihaodian with its traditional offline stores. That kind of integration is often referred to as online-to-offline (O2O), and has been a focus recently for Chinese Internet companies that are forging growing alliances with traditional retailers like department and convenience stores.
I would expect Wal-Mart to invest aggressively in Yihaodian following this move, potentially pumping hundreds of millions of dollars into the company as it plays catch-up to more aggressive names like Alibaba and JD.com. US online retailing giant Amazon (NASDAQ:AMZN) has tried a similar strategy in China, but so far has met with limited success and is still a relatively small player.
Part of the problem for names like Wal-Mart and Amazon is their stronger focus on issues like quality control than Chinese rivals. That focus means they rely more on a direct sales model, compared with an open-platform model used by many Chinese rivals who bring together consumers and third-party merchants over open online marketplaces. Such third-party merchants are notoriously difficult to control, which was a big factor behind a scandal at Alibaba early this year when a Beijing regulator accused the firm of tolerating rampant piracy on one of its main e-commerce sites.
All that said, I do have to commend Wal-Mart for finally taking control of Yihaodian after failing to gain much traction under its previous top executives. Other companies like eBay and Yahoo made similar moves by quickly sidelining company founders after making major China acquisitions in the past. Both of those moves ended up relatively disastrous. But in this case, Wal-Mart will have the benefit of a bit more familiarity with Yihaodian, since it waited 3 years before dumping the company’s founders.
Wal-Mart will also benefit from potential synergies with its well-run network of traditional brick-and-mortar stores in China. It could gain as well from growing pressure on companies like Alibaba and JD.com to adopt more global standards for their operations. For all those reasons, I would give this new Yihaodian better chances of success than previous foreign Internet ventures in China, and could see the company quickly double its market share to 2 or even 3 percent of the market in the next 2 years.
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