Wal-Mart Stores Inc Suffers A Big Setback In China

Wal-Mart’s e-commerce arm in China just lost two of its leaders.

Leo Sun
Leo Sun
Jul 23, 2015 at 9:20AM
Consumer Goods

The two co-founders of Wal-Mart's (NYSE:WMT) Chinese e-commerce company Yihaodian.com both recently resigned, dealing the retailer a major blow in the world's second largest economy. CEO Junling Liu and Chairman Gang Yu, who founded Yihaodian seven years ago, abruptly quit to "pursue their next venture," according to Wal-Mart.

Wal-Mart gained control of Yihaodian back in 2012, when it raised its stake in the site to 51%, but it still remains a tiny player in China's booming e-commerce industry. Let's take a closer look at what Yihaodian means to Wal-Mart, and how much the retailer relies on China for future growth.

A Wal-Mart Supercenter in Beijing. Source: Flickr, Daniel Ng.

What is Yihaodian?
Yihaodian is a B2C (business-to-consumer) site, meaning that it sells products directly to consumers. Last year, its revenue rose 21% annually to $2.3 billion, but it only claimed about 1.4% of the Chinese B2C market, according to research firm BySoftChina. Tmall and JD.com (NASDAQ:JD), the two largest B2C sites, respectively claimed 57.4% and 22.2% of the market. Amazon's (NASDAQ:AMZN) fledgling Chinese site controlled 1.5%.

Based on those figures, Yihaodian's revenues only accounted for 0.5% of Wal-Mart's top line last year. However, Wal-Mart's Asia head Scott Price previously told Reuters that it needs Yihaodian to connect with China's younger consumers and mobile shoppers.

Last quarter, Wal-Mart reported that 40% of Yihaodian's orders were placed online. Its conversion rate, or the percentage of visitors who buy things, also improved nearly 100 basis points versus the prior year quarter. According to iResearch, mobile shopping in China is expected to grow at a compound annual growth rate of 48.4% between 2013 and 2017, versus just 10.4% growth on PCs.

Yihaodian's website. Source: Author's screenshot.

Yet despite that growth potential, Yihaodian's numbers simply aren't as impressive. Last year, JD.com's revenues soared 66% annually to $18.5 billion. That's more than triple Yihaodian's growth rate with more than eight times the revenue. Nonetheless, Wal-Mart is boosting Yihaodian's presence by expanding its online inventory to over 3.4 million products, opening more distribution centers, launching more product categories, and offering more Western brands.

Challenges in China
Wal-Mart doesn't disclose the exact percentage of its total revenues (including brick-and-mortar stores) which come from China, but Trefis analysts peg it at around 2%. The company operated 411 stores in the country (Supercenters, Trust-Mart Stores, and Sam's Clubs) at the end of fiscal 2015.

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Last quarter, Wal-Mart reported that revenue from its namesake stores rose 1.9% annually in China as comparable store sales climbed 1.4%, fueled by strong Chinese New Year sales. The region also outperformed the rest of Wal-Mart's International segment, which posted a 6.6% annual decline in sales due to the strong dollar. On a constant currency basis, international sales rose 3.4%.

However, Wal-Mart continues to struggle against its Chinese hypermarket rival, Sun Art Retail, which has fewer stores than Wal-Mart but a larger overall market share. Sun Art Retail owns 372 stores under its RT-Mart and Auchan banners, which control 14% of the Chinese hypermarket market. State-owned China Resources controls 13.9%, while Wal-Mart lags behind both with 10.6%.

An RT-Mart in Shenzhen. Source: Flickr, Chris.

Some analysts attributed Sun Art's lead to its more localized design, where Chinese "street market" designs -- like fresh seafood on table-tops and in-store noodle stands -- are merged with modern supermarket designs. That's arguably given Sun Art an edge over Wal-Mart's traditional Western-style big box stores. However, both companies remain exposed to potential slowdowns in Chinese consumer spending over the next few years.

The road ahead
To keep up with Sun Art, Wal-Mart plans to open 33 more stores and clubs this year, especially in the southern regions, where it enjoys a stronger market presence. It also plans to boost its omni-channel growth by merging its e-commerce and brick-and-mortar efforts. Later this quarter, it will launch a mobile app which will let Chinese customers order products online and select in-store pickup or home delivery.

Looking ahead, Wal-Mart will need to find a capable CEO to lead Yihaodian to advance that omni-channel strategy. If Yihaodian's sales growth slows down and it cedes market share to leaders like Tmall and JD.com, Wal-Mart could lose its toehold in the booming Chinese e-commerce market.