JD.com, Inc. JD, the China-based expansive online retailer offering products ranging from electronics to fresh food, recently disclosed that it is contemplating taking over the U.K.’s electronic commerce firm, Currys. With 823 stores and roughly 28,000 employees, Currys is an integral establishment within the U.K.'s retail market.
Turning toward an overseas opportunity might seem like an unusual step for such a prominent Chinese company as JD. Let’s unravel the mystery behind JD’s interest in broadening its horizons beyond its home.
What’s Happening In JD’s Home Economy?
To understand JD’s move, one must consider China’s current economic landscape. According to the National Bureau of Statistics, the Chinese GDP exhibited a 5.2% expansion in 2023.
In stark contrast to previous financial years, China's economic growth last year was among the slowest on record. This downturn spotlights the profound impact of a collapse in the property sector and flagging consumer confidence in the world’s second-largest economy, despite a relaxation of COVID restrictions.
This economic picture becomes even bleaker when factoring in two key elements. First, there has been a sharp drop in China's Real GDP growth rate from 1.3% in the third quarter of 2023 to just 1% in the fourth quarter. It's important to remember that until late 2022, China had enforced a stringent zero-COVID lockdown policy, causing earlier growth in 2023 to arise from a shallow base.
The second factor is, considering the effect of deflation, with prices falling 1% over the last year, nominal GDP growth in 2023 was only 4.2%. Nominal GDP growth is crucial for informing elements such as debt ratios, property markets, and earnings. Deutsche Bank’s Jim Reid notes, "So this would help explain the continued weakness in Chinese equities and property markets."
Adding to China's economic woes is a double-whammy of weaker demand both domestically and overseas. Chinese exports in 2023 stood at $3.38 trillion, an annual decrease of 4.6%. A decline in international sales of this nature has not been seen since 2016 when exports declined 7.7%.
Moreover, China seems to be grappling with significant challenges, including a downfall in property investment, escalating debt risk, and sluggish consumption growth. Such factors introduce potential pitfalls in China's economic development in the future.
Highlighting the tense outlook, China, the world’s leader in consumer electronics sales, is forecast to see the biggest drop in this segment.
Growing uncertainties are now looming for both consumers and businesses in China, resulting from the increased regulatory scrutiny across multiple sectors, such as internet technology, gaming, after-school tutoring, and real estate. The undercurrents of unease are further fueled by intensifying U.S.-China conflicts revolving around technological competition.
JD's keen interest in Currys may stem from the company's intention to seek out new avenues for expansion, possibly to reduce its reliance on China's slowing economy.
Potential Benefits For JD If The Deal Materializes
AJ Bell investment director Russ Mould labels Currys as a “unique asset” as it is the “last big UK electricals chain with a physical store estate” with all its rivals online-based. Despite this unique positioning, the retail giant has been struggling in the stock market, with its value seeing a downtrend.
Investec’s equity retail analyst Ben Hunt describes Currys as an “easy steal” for investment firms seeking to capitalize on undervalued firms. He told the BBC that the retailer has “done a lot of the heavy lifting,” trimming £300 million off of its yearly expenses to enhance its business profitability, which could appeal to potential investors.
JD’s recent disclosure, expressing interest in launching a cash bid for all of Currys’ issued share capital, transpires alongside Currys' refusal of a £700 million proposal from Elliott Advisors, a division of Florida-based Elliott Investment Management.
The decision aligns with JD's previous acquisition efforts. In 2020, the company acquired the domestic electronics chain Five Star Appliance, aiming to explore the integration of online and offline sales.
Currys' operations span Ireland and certain regions of Northern Europe, providing a significant geographical reach. For JD, an alliance with Currys isn’t simply about broadening its international territories into the U.K. and Europe.
It also presents an opportunity to harness Currys’ profound expertise and network within the electronics retail sphere, one of JD's core businesses in China. The addition of Currys’ services, like installation, repair, and recycling, could amplify JD's customer value and loyalty quotient.
E-commerce consultancy Dolphin’s founder and analyst, Liu Chengdong, stated that acquiring Currys would bolster JD's brand visibility and retail network in foreign markets.
A successful deal would reinstate JD's international expansion ambitions following its 2023 retreat from Southeast Asian markets, a move considered regressive by industry analysts.
Bottom Line
Currently, JD trails behind competitors Alibaba Group Holding Limited BABA and PDD Holdings Inc. PDD in cultivating revenues beyond the globe's second-largest economy. As JD also grapples with heightened domestic competition from platforms such as ByteDance's Douyin, company founder Liu has expressed criticism over several of the firm's recent managerial decisions and performance. He has urged immediate improvement and decisive action to circumvent any potentially severe repercussions.
To offset the domestic challenges, JD's consideration of new market expansions is a practical strategy.
GlobalData's lead analyst, Emily Salter, offers insights into JD's potential acquisition of Currys, suggesting it could grant JD direct access to the U.K. market. However, Salter also notes that initial profitability may not be a guarantee. Currys is currently contending with stagnant growth rates due to the crippling effects of escalating inflation on consumers' readiness to buy high-value products.
Moreover, the selection of the U.K. as a market expansion destination could pose certain risks. The U.K. economy mirrors China's current struggle with weak consumer spending and a cost-of-living crisis. This economic slump led Britain into a recession in the latter half of 2023.
However, JD's interest in U.K. equities may have been sparked by the current deep discount at which they are trading. With FTSE 100 trading lower than the S&P 500, Nikkei, and Stoxx 600, some U.K. stocks appear as solid bargains.
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