When you think of online shopping, Wal-Mart (NYS: WMT) is likely the last site on your mind. That's a reality that the discount retailer hopes to change -- at least in China. Wal-Mart said on Monday that it would up its stake in Chinese e-commerce company Yihaodian. The move to buy 51% of Yihaodian will give Wal-Mart a controlling stake in one of China's leading online shopping businesses -- a bold move that's long overdue.
The deal should be welcome news for Wal-Mart shareholders as the company searches for new revenue streams. Wal-Mart, which has more than 350 physical stores open in China, hopes to capitalize on the country's growing e-commerce industry. With China's population soaring to 1.3 billion people, 173 million of whom are already shopping online, an increasing number of American retailers are making inroads to China. Even U.S. e-tailer Amazon.com (NAS: AMZN) has a presence in the foreign nation.
In 2008, Amazon purchased Joyo, China's largest retailer of books and media for $75 million. Today, Amazon may be the world's biggest online retailer, but its market share in China is smaller than many of the country's other business-to-consumer sites. Wal-Mart's arrangement with Yihaodian will put it in direct competition with Amazon in the Chinese market. (Although, as far as U.S. e-commerce is concerned, Amazon is the clear leader.)
Smart strategy, difficult market
Wal-Mart's play to grow its online presence in China comes at a time when the retailer is struggling to keep up with competitors on the home front. New format and branding strategies from rivals like Target (NYS: TGT) are certain to turn up the heat on Wal-Mart, a company that has relied on sales at the lowest price to outgrow competitors.
Target's recent partnership with top-selling electronics brand Apple (NAS: AAPL) will bring mini-Apple stores to 25 Target locations beginning this year. While Wal-Mart won't be featuring Apple-staffed stores at its locations, the retailer does sell Apple products online. However, that may change for Wal-Mart's online stores in China. Apple recently pulled its iPad 2 devices from Amazon's Chinese site, as well from other online storefronts that were not authorized to sell the tablets. While Apple denied the removal was related to ongoing trademark issues in China, it could indicate future setbacks for the Mac-maker as well as online sellers of its products in the country.
Obvious advantages exist for retailers expanding into the fastest-growing market in the world, but that goes double for the risks. Daily deal site Groupon (NAS: GRPN) is an example of a web-based business that failed to understand the Chinese market. The company's GaoPeng joint venture in the country fell flat, reportedly forcing Groupon to close at least 10 offices within China last year.
Wal-Mart should have better luck in the tough market given that its new partner, Yihaodian, is one of the fastest-growing companies in China. The company currently runs logistics operations in Shanghai, Beijing, Guangzhou, Wuhan, and Chengdu -- areas in which its 5,400-strong workforce makes same-day and next-day deliveries to customers. A network of established logistics and a clear understanding of Chinese culture should play to Wal-Mart's advantage as it attempts to be the Amazon.com of China.
U.S. companies face a steep learning curve as they attempt to control the retail environment in China. The country's growing retail market is driving billions in foreign investment. But it isn't always easy knowing which companies will thrive and which ones won't survive. For that reason, I encourage you to read The Motley Fool's updated free report, titled: 3 American Companies Set to Dominate the World. This free guide will show you how to tap into three U.S. stocks that are quickly becoming leaders in emerging markets. Click here for instant access to the special report -- it's free.
At the time thisarticle was published Foolish contributor Tamara Rutter owns shares of Amazon, Apple, and Target. Follow her on Twitter, where she uses the handle@Tamara Rutter, for more Foolish insights. The Motley Fool owns shares of Wal-Mart Stores, Apple, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Amazon.com, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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