A Wal-Mart Growth Story You Didn’t Know About

As you have likely heard a thousand times by now, China's middle class is emerging. This naturally leads to increased consumer spending, which then presents significant growth opportunities for retailers given the fact that China has a population of 1.3 billion people.

This is why companies like Wal-Mart Stores (NYSE: WMT  ) , Yahoo!'s (NASDAQ: YHOO  ) Alibaba Group, and Amazon.com (NASDAQ: AMZN  ) have set up shop in China. Though Wal-Mart has a brick-and-mortar presence in China with Smart Choice, Trust-Mart, and Sam's Club, the focus here will be on the company's online presence, which is growing. 

Yihaodian
Wal-Mart owns a 51% stake in Yihaodian.com. In 2012, Yihaodian's registered user base was 29 million people. In 2013, that user base jumped to 57 million people. In 2013, Yihaodian.com delivered approximately $1.9 billion in sales. Yihodian.com now has operation centers in the Fujuan Province (Quanzhou), the Shandong Province (Jinan), and a warehouse center in the Guangdong Province (Hongmei). In 2014, Yihaodian.com plans to expand its product categories, mobile business, and to deploy big-data tools.

The growth for Yihaodian.com is impressive, and future plans could, and should, lead to future growth. This would be a positive for Wal-Mart. However, if you think Wal-Mart is dealing with fierce online competition in the United States, it's nothing compared to the competition it's facing in China.

Alibaba's online domination
Yahoo! owns a 24% stake in Alibaba.com, which acts as a supplier of goods, an online retailer, and a payment processor. Its second-quarter sales increased 61% year over year, and its net income improved 145%. Alibaba's Tmall.com and Taobao.com also delivered $4.9 billion in sales on China's version of Cyber Monday, which took place on Nov. 11.

Most importantly for Wal-Mart, Tmall.com owns a 49.2% market share in China's online-retailing space. Amazon China (Amazon.cn) owns just a 2.7% market share. And Yihaodian.com owns a 1.2% market share.

What does this all mean for Wal-Mart and its subsidiary, Yihaodian.com?

Wal-Mart's future online presence in China
There are two ways to look at this. One way is that this leaves tremendous growth opportunities for Yihaodian.com and Wal-Mart. The other way to look at it is that Wal-Mart is well behind Alibaba and will never catch up. The answer is somewhere in the middle.

Thanks to massive amounts of cash flow generation for Wal-Mart ($23 billion over the past 12 months), Wal-Mart has the luxury of reinvesting in its business in various ways. Therefore, anything is possible, and Wal-Mart never goes down without a fight. I would expect its online presence in China to continue to grow, but it's highly unlikely that it will ever catch Alibaba.

Wal-Mart also must contend with Jingdong.com (18.3% market share). Jingdong (also known as 360buy.com) is attempting to be the Amazon.com of China by operating its own network of couriers and warehouses. It has 1,400 warehouses throughout China, and deliveries are guaranteed to be made within 24 hours.

Alibaba is partnering with delivery-service firms and planning on investing $16 billion in logistics by 2020 in order to maintain its market-share lead over Jingdong and others.

This battle between the two online retailing heavyweights in China is only going to lead to both of them growing stronger. Competition breeds success. This will be a headwind for Wal-Mart's Yihaodian.com. However, based on Wal-Mart's history of winning, market-share gains are still likely. And investors care about growth more than anything else.

On a broader scale for Wal-Mart in China, it plans on opening 110 new facilities in China through 2016, expanding in tier-two, tier-three, and tier-four cities. There are no official definitions for tier cities in China, but tier-one cities are larger cities with higher income levels. Tier-two cities are less populated with lower income levels. And so on. Wal-Mart is betting that income levels will rise in the smaller and lower-income cities.

Wal-Mart also opened two new distribution centers in China late last year, and it plans on opening one more this year. Wal-Mart CEO Mike Duke has stated that the company is committed to growing in China, and that it will invest in new stores, innovation, and its retail supply chain. Therefore, even if Yihaodian.com fails to grow (unlikely), Wal-Mart will still have growth opportunities in the brick-and-mortar space in China.

The bottom line
Wal-Mart's Yihaodian is performing well, significantly growing its membership and sales. While this investment is still in its infant stages (investment made in 2012), that's exactly when investors should take notice. At the moment, Wal-Mart is a mature company that acts as a strong value investment. However, Wal-Mart's decision to take up a 51% position in Yihaodian.com in China demonstrates that Wal-Mart will continue to find ways to uncover growth opportunities.

Conclusively, investors should consider looking into any company that has the ability to generate significant cash flow while also seeking out high-potential growth opportunities. Please conduct your own research prior to making any investment decisions. 

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