Global Retail   /   April 23, 2019

Why Walmart’s China strategy focuses on grocery

Walmart is making grocery the backbone of its China strategy.

Walmart CEO Doug McMillion was in Shanghai last week, where he said the company plans to have 40 Sam’s Club stores in the country by 2020, up from 23 today. Currently, Walmart has 433 retail units in China, which also include 412 Walmart supercenters. Additionally, the retailer last year opened its first Walmart “smart supermarket” in the country, which offers self-checkout technology and claims to deliver orders that are placed within 1.25 miles of the store in less than 30 minutes. And earlier this year, the retailer launched a new program called Omega8, where it plans to collaborate with local startups on retail technology that it may eventually incorporate into its China stores.

But Walmart faces even stiffer competition in grocery in China than it does in the U.S., where same-day delivery and self-checkout are table stakes. (Walmart did not respond to a request for comment.)

Other retailers making a big push in China are also being forced to pick a local giant to partner with — Starbucks partnered with Alibaba to offer delivery, while countless other U.S. brands have made inroads in China by selling through Alibaba’s Tmall.  China is a big market that’s hard for retailers to forego entirely, and it can be a useful testing ground for next-gen technologies. But Walmart faces an added challenge in trying to make inroads in grocery. Demand for grocery delivery is rising in China like it is in the U.S., which requires expensive logistical investments.

To make inroads in China, Walmart’s formed a strategic alliance with Tencent-owned JD.com, to fend off a joint competitor, Alibaba. Alibaba is the largest e-commerce marketplace in China by percentage of total retail e-commerce sales, while JD.com is the second. While competitor Amazon recently announced that it was shutting down its third-party marketplace in China, Walmart’s alliance with JD.com is one of the major reasons why it has managed to survive in a tough market.

“Amazon pulling out of China was a great example of how hard it is for foreign brands to succeed in the China market without a local partner,” said Liz Flora, an analyst for Gartner L2.

Walmart hasn’t always picked the right partners. One of its first investments in a Chinese startup was in Yihaodian, another online grocery startup, in 2011. Walmart then acquired a controlling stake in Yihaodian, and then sold its controlling stake to JD.com, as the once-hot startup failed to evolve to become a serious competitor to Alibaba.

But selling off that controlling stake proved to be the start of other partnerships between Walmart and JD.com. In 2018, Walmart and JD.com jointly invested $500 million in Dada-JD Daojia, an online-to-offline grocery business that uses crowdsourcing to fulfill deliveries. Walmart has also launched online stores for both Sam’s Club and Walmart on JD.com’s website, a joint online/offline promotional campaign called “8.8 Shopping Festival” in the vein of Alibaba’s Singles Day in 2017.

Additionally, when Walmart opened its smart supermarket last year, there were heavy influences of JD.com throughout — at the time, Walmart said that 90% of the in-store inventory was also located on JD Daojia. Customers could also use a program on WeChat (Tencent, which has a significant stake in JD.com, also owns WeChat) to scan and pay for items, without having to download a separate app.

Enabling payments via WeChat is one of the most important advantages Walmart has gotten through its partnership with JD.com, according to Flora. Alibaba also has its own next-gen supermarket chain, Hema, which it launched in 2016. Customers can use the Alibaba app to scan barcodes to find product information and recipe ideas, in addition to paying for items. Alibaba’s also taken the idea of doubling stores as fulfillment centers to the extreme, by placing conveyor belts throughout the store that allow employees to move and fulfill online orders more quickly.

Humphrey Ho, the managing director for Hylink Digital, an agency that helps U.S. brands market to customers in China, said in an email that there are a few trends working in Walmart’s favor right now as it and JD.com hope to make inroads against Alibaba. He said that he believes Sam’s Club still has room to grow in the southern part of China, most notably in Shenzhen, Guangzhou and Shanghai. He said that Sam’s Club has already proven popular there — even though loyalty to domestic brands is high in China — because car ownership there is higher compared to other parts of China, and it’s a part of China that “is more value-oriented and [has] bigger family structures.”

“They have seen more success [in that region], and will likely more see success there,” Ho said.

Additionally, Ho said that there are other ways Walmart can leverage its partnership with WeChat via JD.com to its advantage. Walmart could roll out drive-through pickup, like it has in the U.S., through WeChat in parts of China where car ownership is high. It could also create a membership program through WeChat, and offer access to more exclusive deals.

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