E-COMMERCE: Free of Walmart Restraint, China’s Yihaodian Gets Tough

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Bottom line: Yihaodian could regain momentum in China’s online grocery market under an aggressive 1 billion yuan promotion by new owner JD.com and strong support from former owner Walmart.

Yihaodian launches 1 bln yuan promotion

One major obstacle for foreign companies in China is their reluctance to engage in the kind of cut-throat price wars that are all too common in many of the nation’s huge but extremely competitive emerging markets. Such reluctance was a big factor behind the disappointing progress for Walmart’s (NYSE: WMT) local e-commerce venture Yihaodian, and prompted the US retailer to sell the company in June in exchange for shares of local e-commerce powerhouse JD.com (Nasdaq: JD). Now we’re getting word that JD is preparing to position Yihaodian as its flagship online grocery store, and is getting set to launch a massive price war in its bid to achieve that target.

According to the latest reports, Yihaodian’s new campaign to boost its business includes 1 billion yuan ($150 million) in funds earmarked for promoting the site. (Chinese article) That plan was discussed in an interview with a top Yihaodian executive, who said his company also plans to fully leverage its ties with both Walmart and JD in a campaign over the next 3 months.

The campaign is taking aim at the equally aggressive grocery service on Tmall, China’s largest B2B e-commerce service operated by JD’s chief rival Alibaba (NYSE: BABA). In unusually direct language even for China, Yihaodian says it will offer aggressive low prices as it seeks to consolidate its position in the East China market where it has traditionally been strongest.

This kind of cutthroat competition is quite common for China, and often results in prolonged price wars that can be quite costly. JD is already quite familiar with that terrain, having fought such wars with Alibaba and a number of smaller rivals over the last few years. The stiff competition has kept JD’s bottom line squarely in the red for nearly all of its life as a publicly traded company, though earlier this week it reported its loss narrowed considerably to $20 million in its latest reporting quarter. (previous post)

Walmart is just one of many western companies that have tried to compete on China’s Internet over the years, only to fail. Others that have followed a similar path include search sites Yahoo (Nasdaq: YHOO) and Google (Nasdaq: GOOG), and online auction specialist eBay (NYSE: EBAY). Even global e-commerce giant Amazon (Nasdaq: AMZN) has struggled to compete with local rivals despite years of trying and millions of dollars in investment.

Profit Obsession

Observers often cite the foreign companies’ obsession with profits as one of their biggest handicaps, as few are willing to play in the market for years without a clear road map to profitability. By comparison, Chinese companies don’t tend to think that far ahead, and often simply rely on new funds from their wealthy backers in hopes that they can outlast all their rivals to someday become market leaders.

Walmart clearly wasn’t prepared to take that approach when it agreed to sell Yihaodian in exchange for 5 percent of JD’s shares back in June. (previous post) Since then JD’s stock has jumped around 16 percent, including a 4.7 percent gain after JD announced its latest financial results earlier this week.

Walmart bought a controlling stake in Yihaodian in 2012, and later bought out the company. But it was never able to gain any traction in China’s fiercely competitive e-commerce space, and last year ended up sacking Yihaodian’s founders who were still running the company.

Going forward, Walmart appears to be content to let JD.com become its main China e-commerce partner and provide support using its own extensive supply chains and logistics networks. Chinese social networking giant Tencent (HKEx: 700) has taken a similar tack, and previously sold its struggling e-commerce business to JD as part of a bigger deal that saw it also take a major stake in the company.

This particular strategy appears to be working well for Tencent, and I expect it could also work well for Walmart. At the end of the day, Walmart clearly didn’t have the experience or the stomach to take the aggressive steps needed to become a serious player in China’s e-commerce market. Yihaodian’s price war plan under its new JD ownership is almost certain to result in big losses that Walmart wouldn’t have tolerated. But such big losses are quite routine for JD.com, which is simply rolling over its own business model to Yihaodian.

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