RETAIL: Wal-Mart Dumped by China Partner As Landscape Changes

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Bottom line: Wal-Mart’s loss of China Resources as one of its major Chinese partners reflects rapid changes in the traditional retailing market, and could prompt Wal-Mart to accelerate an overhaul of its broader China strategy to focus more on e-commerce.

China Resources dumps Wal-Mart JV stake
China Resources dumps Wal-Mart JV stake

Just 3 months after sacking the founders of its China e-commerce site, US retailing giant Wal-Mart (NYSE: WMT) has suffered yet another blow in the huge but difficult market with the loss of a major local partner for its traditional brick-and-mortar stores. That move is seeing China Resources, one of the country’s biggest and oldest consumer names, dump shares worth $515 million in a number of Wal-Mart stores that it jointly owns with the US retailing giant.

The move isn’t all that surprising for a number of reasons, but still doesn’t look too good for Wal-Mart in the fast-changing Chinese retailing market. For starters, China Resources is already a major owner of smaller supermarket chain called Vanguard. It also moved into the hypermarket business 2 years ago when it effectively took over the China-based operations of British giant Tesco (London: TSCO) through a joint venture. (previous post)

From a broader perspective, the move also reflects the surging popularity of e-commerce in China, where traditional retailing chains never really had the chance to develop into a mature presence due to their short history. That factor has helped to pave the way for the rapid rise of e-commerce companies like Alibaba (NYSE: BABA) and JD.com (Nasdaq: JD), whose costs are typically much lower than traditional retailers. Online shops also offer more convenience for customers, and are quickly cutting delivery times to become more competitive with brick-and-mortar rivals.

While many other big western retailers like Best Buy (NYSE: BBY) and B&Q (London: KGF) have shuttered their China operations completely, Wal-mart has been one of the few to stick to its guns and keep opening new stores. But now it will have one less partner for that drive, as China Resources has formally listed its stakes in 21 Wal-Mart stores for sale on an internal Chinese market for such transactions. (English article; Chinese article)

Wal-Mart confirmed China Resources’ “investment decision” and said it respected that move, and added there would be no impact on its operations. It wasn’t clear if any buyer had stepped up to purchase the stakes, which were listed for sale at 3.3 billion yuan ($515 million) and collectively account for 35 percent of the pair’s jointly owned stores. The affected outlets vary geographically from western Sichuan province to Beijing.

Wal-Mart also counts another one of China’s oldest and largest conglomerates, Citic Group, among its joint venture partners for stores in central and eastern China. It announced that tie-up a decade ago, in a joint venture that planned to open hundreds of stores at the time. But that was back in the days when traditional retailing in China was hot, and I doubt the venture ever reached its lofty targets.

Changing Retail Landscape

Lukewarm performance is almost certainly at least partly behind China Resources’ decision to sell its stake in the jointly owned stores. But its Tesco joint venture formed 2 years ago is probably also a major factor. Many of those same Tesco stores probably compete directly with Wal-Mart in some areas, and China Resources probably also needs the cash to maintain and improve those Tesco outlets.

The loss of such a major and well-connected partner certainly doesn’t bode well for Wal-Mart, as it struggles with its direction in the Chinese retail market. Unlike the other big western names, Wal-Mart was one of the few multinationals to realize the importance of e-commerce relatively early in China. It chose homegrown player Yihaodian as its main e-commerce vehicle, initially buying a controlling stake and taking over the company completely this year.

But Yihaodian failed to live up to expectations under the management of its founders, who remained in place even after the initial partnership, and the site currently holds less than 1 percent of China’s B2C e-commerce market . Wal-Mart finally sacked the pair back in July, though the move was more politely called “resignations”. (previous post) Since then it has probably installed its own people and is in the process of a major overhaul. I expect Wal-Mart will try to integrate the site better with its own China site and brick-and-mortar stores, as part of a booming business for online-to-offline (O2O) services.

At the end of the day, China Resources is struggling with its own issues due to reliance on traditional retailing, and its departure probably won’t hurt Wal-Mart too much. Perhaps the move may even spur Wal-Mart to buy up the actual stakes being sold at a discount, which would give it greater flexibility in closing some of the underperforming stores and better integrating the remaining ones with its online presence.

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