Market Overview

Wal-Mart's Poorly Timed Investment in China


Even when consumers were shopping less, e-commerce was booming. The convenience of online shopping made online retail sales jump by 12.6 percent in 2010 to $176.2 billion, and that number is expected to jump to $278.9 billion by 2015, according to Forrester Research. Wal-Mart (NYSE: WMT) has been trying to capitalize on this growth in online sales for quite some time, even opening two display stores in California that point customers to the company's website to make purchases.

Now the company is hoping to broaden its ecommerce revenue abroad, thanks to a new investment in Chinese firm Yihaodian, an e-commerce site that sells groceries and retail items to consumers. If the deal is approved by the Chinese government, Wal-Mart will have a controlling stake of 51 percent in the company, which Wlamart Global eCommerce CEO is touting as an opportunity for Wal-Mart "to deliver a superb customer experience to Chinese consumers that are already connected to the world through smart phones and social media."

The American retailer has been eyeing China for some time. In 1996, the company entered China through a joint venture after the company had been importing Chinese goods for years. Now, the company has over 350 stores throughout the country and China is one of the fastest-growing markets for the company. In 2010, $7.5 billion in sales revenue came from China.

As part of its Chinese expansion, the company bought a minority stake in Yihaodian last year. While the amount invested was not made public, it couldn't have been much by Wal-Mart standards. The Chinese company saw sales of $429 million in 2011, up a breathtaking 235 percent over the previous year's sales of $127 million. Still, the company is microscopic compared to Taobao, a subsidiary of Alibaba (HKG: 1688) that expected sales to reach $15 billion in 2011 and twice that by the end of this year. Last year, Taobao's travel site alone earned over $1.5 billion, over three times Yihaodian's total sales.

By both Wal-Mart's and China's standards, the company's investment in Chinese e-commerce is toe-dipping at best and should not be overhyped by eager investors eyeing the billion consumers in China. Both e-commerce and retail sales in China are sexy topics for investors who see both as promising growth markets in an otherwise uncertain and unstable economy. Investors may be especially excited at the move, which coincidentially comes after China lowered bank reserve ratios for the second time in three months. The move helped Asian markets climb in the hopes that extra liquidity will promote growth.

Such eagerness should be tempered by discipline. China's slowing growth may also slow consumer consumption. Two moves to bolster lending in three months signals an urgency in China to make sure the country's unsustainable growth rate sticks around for a little while longer. Unless Chinese officials are willing to cut reserve requirements further, we may see last month's headlines about slowing growth in the country return. That would mean less consumer spending, and less growth for Yihaodian.

For now, Wal-Mart's move may help it offset a 15 percent net income loss driven by slower-than-expected domestic demand, as it signals an aggressive and global expansion strategy. In the long term, investors may realize that the investment is small and poorly timed. Eventually, the market will keep its focus on Wal-Mart's domestic sales figures, which accounted for 62 percent of the company's total sales last year, excluding Sam's Club. That segment grew by only 0.1 percent in 2011, which should preoccupy investors much more than the company's new Asian purchase.

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