Walmart sells e-commerce in China: What is the strategy behind?
The websites are the first interface between the customers and the seller, which leads to e-commerce retail becoming a major retail distribution of the market in China. However the distribution of e-commerce market is not balanced and the competition among companies is severe. In order to break the pattern of the market, many companies are looking for new methods of development. At recent, JD.com and Walmart are the hottest organizations in the Chinese online shopping.
Chinese online shopping sites distribution
Online business is becoming the fastest development market in China. The range of e-commerce trade reached 1.34 trillion RMB in 2014, while the online shopping volume increased by 48.3%. However, the total online sale market is dominated by several famous online platforms. According to iResearch, the transaction scale of Chinese B2C online shopping sites reached 2 trillion RMB in 2015. T-mall and JD.com are two giants of e-commerce sphere, which took up 58% and 22.9% market shares respectively; while others, such as Suning, Vipshop, and Yihaodian, only occupied less than 3% of the market shares. In this unevenly distributed market, Walmart and JD.com cooperation are a powerful force regarding the transformation of the Chinese online shopping. On June 2016, Walmart announced that it had done a strategic partnership with JD.com; partnership would bolster the presence of both companies in the mainland. Walmart spent 40 billion RMB to take a 5% stake of JD.com, and JD.com owns the operation rights of Yihaodian as an exchange. The high profile of cooperation leads to heat discussions.
Three main reasons for this change
- Walmart: from offline to online
In this cooperation, the intention of Walmart seems obvious. It is known to all that Walmart has been a retail giant all over the world for decades. Nowadays, although the first position is unshakeable, the recent sales margin is declining. Overall sales revenue was at 482.13 billion USD in 2015, which had 0.7% negative growth. In China, Walmart had closed low-profitable stores in big cities and opened 110 outlets in medium size cities trying to prevent the decreasing sales volume. Even with these transformation measures, it cannot satisfy the ambition of Walmart. Since the online trend among Chinese people, Walmart’s intention is to extend its online presence and establish an O2O business model. However, on one hand, the penetration of Walmart physical stores is relatively low with less than 500 stores in the whole country, which make the real-time delivery tough. On the other hand, the T-mall online supermarket is the major competitor of Walmart and it has significant advantages as T-mall has a well-established mechanism logistics system in both resources management and delivery.
JD.com, the second-biggest e-commerce site, has approximately 6,000 deliveries and pickup stations in about 2,500 counties and districts across China. In contrast, Yihaodian, the Chinese online shopping food sales site of Walmart, only operates about 250 hubs and takes up 1.3% e-commerce market share in china. Thus, Yihaodian is expected to increase online transactions with the help of JD.com resource and eventually establish the O2O business model. However, there is a potential problem that may threaten the survival of Yihaodian. In 2014, JD.com signed an operation contract with Tencent and charged some mature e-commerce sites, which had a similar background as Walmart. But till now, these sites were abandoned because of the incompatible model with the original JD.com system. This event leads the public to think whether Yihaodain will meet the same issues.
- JD.com: a gamble with Alibaba
This cooperation seems to give more benefits to Walmart than JD.com. What JD.com can provide is the assistance system to help Walmart expanding its online presence. However, this action is a clear signal from JD.com to show its ambition, with the transcending Alibaba in a near future. Fresh food and groceries is a relatively new field in the Chinese online shopping. It had been popular in China, but there is no single sites provide mature service. Thus, JD.com wanted to seize this opportunity and bet on this trail to transcend Alibaba. Last August, Alibaba, and Suning, another 3C online company (computer, communication, and consumer electronics), reached a surprising strategic cooperation which was a shock for JD.com development. Feeling a real threat from this partnership, JD.com is eager to find a new strategy to pin down Alibaba. Therefore, JD.com considered that developing fresh food and groceries business is the best choice because the online supermarket is a big opportunity and there is no big competence difference between Alibaba and JD.com. The determination of JD.com to develop the fresh food and groceries department is obvious. JD.com firstly merged with Yonghui supermarket, the leader of Chinese domestic supermarket, with 4.3 billion RMB, and now cooperates with Walmart. The fusion of the physical Walmart stores management system and JD.com delivery chain is expected to be developed into an O2O business model. However, the consequence of this enormous investment remains uncertain. This is partly due to the offline grocery market is too familiar to customers and the current logistic system cannot connect to the local supermarkets, which makes the food refreshment requirement of customers hard to realize. These problems are the main obstacles of JD.com’s new strategy to promote its online supermarket.
Last August, Alibaba, and Suning, another online company (computer, communication, and consumer electronics), reached a surprising strategic cooperation which was a shock for JD.com development. Feeling a real threat from this partnership, JD.com is eager to find a new strategy to pin down Alibaba. Therefore, JD.com considered that developing fresh food and groceries business is the best choice since the online supermarket is a big opportunity and there is no big competence difference between Alibaba and JD.com. The determination of JD.com to develop the fresh food and groceries department is obvious. JD.com firstly merged with Yonghui supermarket, the leader of Chinese domestic supermarket, with 4.3 billion RMB, and now cooperates with Walmart. The fusion of the physical Walmart stores management system and JD.com delivery chain is expected to be developed into an O2O business model. However, the consequence of this enormous investment remains uncertain.
- E-commerce market: a new business model emerges?
This cooperation is also meaningful for the whole e-commerce market in China. Indeed, the retail market is under huge transformation.As customers focus more on integrating shopping experience, the e-commerce giants are adapting to the demand and are therefore looking for transformation into O2O business model. With the diversity of digital portals, the consumption of mass will increase and therefore push the development of new technology. In addition, the e-commerce market pattern is under benign competitions. One of the reasons for Alibaba being the leader in the market is that Chinese e-commerce market is saturated. It is to say that temporary e-commerce sites are specialized in different aspects. For example, Taobao and T-mall are professional at apparel and accessories, whereas JD.com is developed from 3C (computers, communication, and consumer electronics) products and Vipshop focus on special selling. Since all these online platforms have established different operation system to support their own presence, this high standardization of the online retailers makes the entry for newcomers difficult. However, the development for fresh food and groceries e-commerce may also change the pattern of e-commerce market by breaking the balance of current operation model since the target group of this field cover is so large that almost cover all people across the country. Afterward, the new market pattern may change and drive the new retail model which can provide integrate shopping experience and not restricted by O2O model.
In a word, Chinese e-commerce market is booming and is changing rapidly. This market seems to be around saturation. There are still many business opportunities not discovered. This collaboration between Walmart and JD.com is a trail of changing Chinese e-commerce market though this strategy is right or not is uncertain. It is possible for this cooperation to change the market pattern and e-commerce technology. Moreover, in the period of transforming, it will give rise to the development of many small companies in this field to makes the market healthier.
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