US retail giants invest in strategic partnerships
In recent years, leading American retailers have realized that their future growth depends on foreign markets – particularly China.
China’s massive market size, economic strength and increased affluence has led to strategic partnerships between these retailers and China’s e-commerce platforms, including Walmart and JD.com, Kroger and Alibaba, and, most recently, Amazon and Pinduoduo.
We’ll look at why these retail leaders see collaboration as the way forward – and how other US retailers and brands can increase their reach and decrease their risk when expanding to new markets.
Walmart and JD.com team up to tackle smart retail
Walmart, the world’s largest retailer, has been in China for more than 20 years, having opened its first store in Shenzhen in 1996. It has since grown its presence to a whopping 433 stores and more than 100,000 employees in China.
But in recent years, competition has intensified as more business moved online and competitors such as Yonghui Superstores’s Super Species chain and Alibaba’s Freshippo chain have adopted new omnichannel store formats.
Walmart’s own venture into China e-commerce, Yihaodian, failed and was sold to China’s largest online retailer, JD.com, for an undisclosed price in 2016. Walmart then purchased a 5% stake in JD.com for US$1.5 billion; that stake has since risen to 12%.
The partnership between the two companies has only deepened; they’ve since co-invested US$500 million in Dada-JD Daojia, an on-demand delivery business that ships groceries and daily necessities to local consumers, leveraging Walmart stores as fulfillment centers. More than 100 of Walmart’s stores double as warehouses for JD.com.
This model helps Walmart downsize its stores and move more of its inventory online, similar to its newer competitors in the grocery business.
Consumers can order items delivered through the Walmart WeChat mini-program app or JD.com’s e-commerce platform. WeChat is China’s most popular social media platform, which integrates e-commerce. The mini-app is designed for high-turnover products, while the JD.com store is more for lower-turnover, high-margin imported products such as Pampers diapers and Wyeth milk powder.
And now Walmart is expanding its presence yet again in China, announcing in November that it will double its store count in China by adding 500 new stores over the next 5-7 years.
Many of these stores will adopt the omnichannel retail concept, supplementing smaller offline stores with a larger, interconnected online selection of products.
Amazon partners with Pinduoduo to make a comeback
Amazon has run through its fair share of troubles in the China market. After purchasing online bookstore Joyo for US$75 million in 2004, Amazon China expanded its selection to include general merchandise.
However, Amazon suffered from its inability to customize its global platform for the Chinese customer, who prefers a brand-centric interface with lots of discounts and bold colors.
Amazon also struggled to match the free shipping and overnight delivery options its local competitors offer; its supply chain operations weren’t as well adapted to the China market. Subsequently, its market share dwindled to less than 1% this year, when it decided to shut down its domestic China business in July.
Yet Amazon hasn’t completely given up on the China market. It still operates a cross-border import site for popular US and foreign brands, selling the likes of Dove skin cream, Philips automatic toothbrushes and Olay anti-aging serum. Many beauty and cosmetics products cannot be sold in China due to animal testing requirements and onerous product registration processes.
During Black Friday promotions this year, Amazon announced that it was launching a pop-up store on Pinduoduo’s e-commerce platform.
Pinduoduo is now China’s second-largest e-commerce platform by gross merchandise volume, having made its claim to fame by focusing on untapped customers in China’s lower-tier cities. Pinduoduo has the user traffic and customer base needed to put Amazon back on the map.
The Amazon pop-up store lists more than 1,000 imported products from the likes of Bose and Timberland, and will last until the end of 2019. A longer-term partnership between the two hinges on the success of the pop-up store, which will gauge Pinduoduo user appetite for imported products.
While it remains to be seen if the two will enter into a longer-term relationship, Pinduoduo is Amazon’s only choice left for a strategic online partner, given that JD.com has already partnered with archrival Walmart.
Kroger uses Alibaba to launch its private label products
Kroger and Alibaba’s relationship is a much smaller and newer partnership. Cincinnati-based grocery retailer Kroger, a $23 billion behemoth with nearly 2,500 stores scattered across the US, only recently turned its sights towards the China market.
In 2018, it announced that it was setting up a flagship store on Alibaba’s Tmall platform to sell imported private label products.
What’s the top-selling product? A bag of fruit ring cereal, which retails for 89 RMB per item (US$12) and comes with a small bag of dried prunes. Other products include sleeping pills, Himalayan sea salt and honey nut-flavored oats.
In this sense, it focuses on selling imported products that are inherently foreign, so that it doesn’t have to compete with local suppliers.
Many Chinese consumers purchase imported products because they believe these products offer superior quality, as they are produced with higher-quality ingredients and prone to more intense quality control processes.
This belief explains why consumers are willing to fork over 89 RMB (US$12.71) for a bag of fruit rings cereal, when typical cereal products in the US sell for just a few dollars a box.
- Walmart chose to partner with JD.com after its own e-commerce business failed in China. It has since deepened its partnership, offering its stores as fulfillment centers for JD.com’s on-demand delivery service and opening a flagship store on its e-commerce platform.
- Amazon opted to partner with China’s hottest new e-commerce platform Pinduoduo after shuttering its own China e-commerce business. Pinduoduo benefits from Amazon’s global selection of imported products while Amazon can leverage Pinduoduo’s large user base.
- Kroger opted to sell its own private-label imported products on Tmall’s cross-border Tmall Global platform. This way, it leverages its foreign brand to convey a higher sense of quality, which is why it can sell a bag of fruit rings cereal at much higher prices than in the US.
Franklin Chu, managing director of Azoya USA, is an expert and speaker on China cross-border e-commerce. Franklin also serves as President of Sage Capital Group Inc. a private equity and investment management firm and is a graduate of Yale University and Harvard Business School.