JD Values Cooperation With Walmart Much More Than Its Chinese E-Commerce Business

(Chinese Version)

On June 20, 2016, Walmart (NYSE:WMT), and JD.com (Nasdaq:JD), the second largest online retailer in China (after Alibaba), announced that they have formed a strategic alliance. The deal entails that Walmart becoming a strategic investor of JD Group, and that JD owning the major asset of Yihaodian. According to the agreement, the companies will partner in several strategic areas, including:

a. Walmart will receive 144,952,250 newly issued JD.com Class A ordinary shares, amounting to approximately 5 percent of total shares outstanding;

b. JD.com will take ownership of the Yihaodian marketplace platform assets, including the Yihaodian brand, website and app. Walmart will continue to operate the Yihaodian direct sales business and will be a seller on the Yihaodian marketplace, leveraging its global supply chain to provide customers a wide range of products. JD.com and Walmart will work together on growing the Yihaodian brand and business under its current name and market position.

c. Sam s Club China, which has proven tremendously successful within the markets it operates in China, will open a flagship store on JD.com, vastly expanding the availability of Sam s Club s high-quality imported products across China. It will offer same- and next-day delivery through JD.com s nationwide warehousing and delivery network, which covers a population of 600 million consumers.

d. Walmart and JD.com will work together to leverage their supply chains to increase the product selection for customers across China, including broadening the range of imported products.

e. Walmart s China stores will be listed as a preferred retailer on JD.com s O2O JV Dada, China s largest crowd-sourced delivery platform, driving online traffic to Walmart stores and allowing customers to order fresh food and other items from Walmart stores for 2-hour home delivery, while significantly broadening the product selection available to Dada s customers. Walmart will continue to operate its own physical stores.

The agreement includes a wide range of things, but the following three pieces of details are especially worthy of your attention.

1. Yihaodian was “sold” again

Walmart took full control of Yihaodian in 2015, so it s less than a year when it was again “sold” to another party.

Founded in 2008, Yihaodain was initially established as a B2C online supermarket, selling mainly cosmetics, food and fast moving consumer products. In 2009, its sales skyrocketed by 11 times. As of 2011, Yihaodian rose to become one of the top 10 e-commerce platforms in China, with annual sales of around $4.55 billion. However, as the competition in the Chinese online retailing market grew fiercer, Yihaodian s market share began to drop year after year. As of June, 2015, Yihaodian s market share had dropped to 1.5%, ranking the 6th in the entire market.

As Yihaodian s market share dropped, its shareholders also changed. In May, 2010, China Ping an invested $121.5 million to become the biggest investor of Yihaodian, but failed to integrate Yihaodian s resources later on. In May, 2011, Walmart approached Yihaodian for the first time and bought 17.7% stake. In August, 2012, under the permission of the Ministry of Commerce, Walmart increased its stake to 51.3% and became the biggest shareholder of the company.

In the process, the stake of Yihaodian s founder and other co-founders was severely diluted. While their stakes in total end up accounting for merely 11.8%, their operation philosophy diverged a great deal with that of Walmart. At last, two co-founders of Yihaodian left in July, 2015. Following, Walmart announced that it had acquired all the rest share of Yihaodian and thus took whole control of the company. However, it is obvious that Walmart also failed to integrate Yihaodian s resources to itself well enough.

2. Yihaodian was “sold” much lower than $ 6.08 billion

As a matter of fact, during the June, 18th online shopping festival, rumor had it that JD was to acquire Yihaodian with $6.08 billion, and that Alibaba and Hainan Airlines had similar plans, which brought the negotiation into a standstill.

However, it turned out that Walmart would receive 144,952,250 newly issued JD.com Class A ordinary shares, amounting to approximately 5 percent of total shares outstanding. JD s total market value is currently estimated as $2.985 billion, so 5% share would be $1.49 billion, which is much lower than the expected $6.08 billion.

3. Yihaodian is to follow the path of Yixun.com?

This deal reminded many people of the deal between Tencent and JD, selling Tencent s Yixun and QQ Shopping to JD.

Of course, people thought so for a reason. Yihaodian and Yixun used to be two of the leading e-commerce platforms in Shanghai. However, both of them were sold for several times. After Tencent finally sold Yixun to JD, Yixun not only didn t develop well independently, but also didn t integrate with JD, because Yixun and JD s business overlapped too much. Thus, Yixun ended up existing only in name.

This is also true in the deal between JD and Walmart. For JD, the opportunity to cooperate with Walmart is far more important than acquiring Yihaodian. While JD finally got access to supermarket resources and JD s stock price won the support from global retailing giant Walmart, Walmart can also gain an upper hand by integrating better e-commerce resources. The deal is certainly a good thing for both the former and the new owner, but not necessarily for Yihaodian. After all, Yihaodian and JD s business also overlap a great deal.

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The following is the full transcript of JD s internal letter:

Walmart and JD.com Announce Landmark Strategic Alliance

Dear colleagues,

We are very happy to announce that JD.com and global retailing giant Walmart have formed a strategic alliance. In the future, we shall further cooperate with each other in in terms of business, supply chain, talent, technology and logistics, etc. It is our goal to establish the leading O2O retailing business model and better serve consumers across China through a powerful combination of e-commerce and retailing.

Walmart left its base, a tiny American town, in 1962 and later on played a key role in the restructuring of the American retailing industry. JD, based at first in Zhongguancun in 2003, grew up and represented the rise of the Chinese internet and e-commerce industry. Although Walmart and JD were established in different countries, different era and different cultural backgrounds, our goal is the same: make the world a better place for people to live through lowering cost and improving efficiency. Today, our cooperation not only caters to the trend towards globalization, but also exemplifies the blend of “American dream” and “Chinese dream”.

According to the agreement, JD.com will take ownership of the Yihaodian marketplace platform assets, including the Yihaodian brand, website and app. Walmart will continue to operate the Yihaodian direct sales business and will be a seller on the Yihaodian marketplace, leveraging its global supply chain to provide customers a wide range of products. JD.com and Walmart will work together on growing the Yihaodian brand and business under its current name and market position.

At the same time, we are going to cooperate with Walmart in other related areas. For example, based on Walmart s potent global purchase ability and supply chain as well as JD s nation-wide storage system, we are going to provide a wider range of products, from abroad or at home. In addition, we are also delighted to welcome the Sam s Club flagship store onto the JD.com platform and deliver customers high-end products by integrating our storage, logistics and user system. Moreover, all Walmart s stores in China will be added to JD s crowdsourcing logistics platform Dada and O2O platform JD Daojia, so that we will be able to deliver users fresh produce from Walmart within two hours. In the foreseeable future, we are going to further cooperate with Walmart in areas such as big data, technological innovation, supply chain management, modern logistics, etc., together embrace industrial revolution and play a role in the upgrading of the Chinese retailing industry. It is our goal to create more values for Chinese consumers and help more Chinese brands to go abroad with their high-quality products.

Great business practice must adapt to the trend of the time. Throughout the past five decades, Walmart fundamentally changes the American retailing industry and has become an indispensable part of American lifestyle. By upholding honesty and brand, JD has gradually won more and more favorable comments from consumers amid the rapidly-developing Chinese internet and e-commerce industry. In the future, China will certainly become the largest retailing market around the world. In this sense, the cooperation between JD and Walmart symbolizes not only the similar business scale of both companies, but also the same business philosophy and the mutual admiration towards each other. Both companies uphold the interests and needs of our customers, the sense of honesty and strikes for the best. These are the very foundation of JD s business philosophy, and will certainly help us thrive in the future.

Walmart and JD s strategic landmark alliance is of special significance in the Chinese retailing industry. In face of the tradition and innovation, present and future of retailing, we wish that everybody at JD be open to change, be brave, and respectful. Let s make full use of our wisdom and strength, contribute to a better future, and together make JD more competitive and better at global vision and strategic planning.

JD Group
2016.6.20
June, 20th, 2016

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Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.