Wal-Mart China Seeks Redemption With Alipay Partnership

May 15th, 2015 by Trefis Team
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In an effort to revive its business in China, retail giant Wal-Mart (NYSE:WMT) has partnered with Alibaba (NYSE:BABA) to roll out Alipay mobile payment solutions in its stores. According to an announcement by Ant Financial, Alibaba’s financial affiliate, the Chinese e-commerce giant will initially launch the service in 25 Wal-Mart stores and later add this to the American retailer’s entire store fleet. [1] While the deal will help Alipay continue its penetration in the Chinese online payment market, currently standing at over $1.6 trillion, it will help Wal-Mart increase its potential customer base and catch up to its competitors. [2] Major retailers such as Carrefour, 7-Eleven and China Resources Vanguard Co. already accept payments through Alipay, and Wal-Mart’s decision to partner with the e-commerce retailer appears more of an inevitable move rather than a growth strategy. [3]

Wal-Mart entered China in 1996 and even after almost two decades in the country, its business has grown to just over 400 stores. The retailer has had problems in understanding discerning Chinese consumers as their buying decisions are not always price driven. They are more inclined towards tailor-made products and a shopping environment that reflects local preferences. Since Wal-Mart is a foreign retailer, it has not been able to gain significant customer trust, despite its efforts to be local. In addition to these challenges, Wal-Mart has been at the receiving end of a growing perception that it is not the cheapest in the market, and this is where it is losing its USP.

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With partnership with Alibaba, Wal-Mart is looking for two things. Firstly, to increase its reach in the country where Alipay is the among the most popular payment modes and, secondly, to come at par with competitors who already accept Alipay. This deal would not be capital-intensive for Wal-Mart as its stores will require just a basic bar-code scanner to scan customers’ smartphones having Alipay Wallet. Hence, there will not be much pressure on the retailer’s budget for China, and its capital will continue to go to new store openings. By the end of 2017, Wal-Mart plans to increase its store count to 525-530, with probably all of them accepting Alipay. [4]

Our price estimate for Wal-Mart stands at $82, implying a premium of about 5% to the current market price.

See our complete analysis for Wal-Mart

Root Of Wal-Mart’s Struggle In China

China, the second largest economy in the world, is a lucrative market for western retailers due to its huge population, booming middle class and rising disposable incomes. Entering this market in 1996, Wal-Mart was one of the first retailers to take advantage of this growth opportunity. However, the difficulty of adapting to the local market has made it difficult for foreign retailers to gain a significant presence in China, and Wal-Mart is no exception. Wal-Mart China contributes only around 2% to the company’s overall revenues, which is surprising considering that China is one of the fastest growing retail markets in the world.

The retailer’s efforts to grow in China have been undermined by shrewd consumer behavior and the dominance of Sun-Art retail group. More than prices, Chinese buyers are concerned about the authenticity and quality of products. While Wal-Mart’s EDLP (every day low prices) strategy has been very successful around the globe, it has been regarded as cheap and unsafe in China. In fact, it has been stated by Wal-Mart China’s CEO in the past that local consumers’ biggest concern is trust and authenticity. [5] It appears that Wal-Mart is even losing its image as the cheapest place to shop in the market with local retailers successfully imitating its business model.

While Wal-Mart is not short on long-standing problems in China, a few factors have added to its under-performance in the recent past. Government austerity measures,  reduction in gift card sales and deflation in key categories such as dry groceries, liquor and consumables have suppressed the retailer’s growth. Last fiscal year sales from the region fell 0.7% and comparable sales were down 2.3%. [6]

How Alipay Can Help

Credit card payments are still not very popular in China and mobile transactions are regarded as one of the most viable alternatives to cash. Last year, total online transaction volumes processed by Chinese online payment services stood at around $1.66 trillion, and third-party mobile transactions contributed almost $1 trillion to it. [7] Alipay, which is the leading third-party online payment solution in China, handled almost $788 billion in transactions for the year ending June 30. [8] This gives it a market share of almost 47% in the Chinese online payment market. To better gauge how expansively Chinese consumers are using Alipay at places other than Alibaba, we take a look at the company’s performance metrics.

Alipay handles almost 80% of Alibaba’s gross merchandise value (GMV), which totaled at $370 billion in 2014, and transactions through Alipay were at $296 billion. [9] [10] This implies that Alipay handled around $490 billion in transactions that did not take place at Alibaba, which is a figure huge enough to intrigue a retailer such as Wal-Mart. To attract customers to stores, Wal-Mart will mainly look to leverage Alipay’s mobile payment service, a market which itself is destined to grown. In 2014, the third-party mobile transaction market stood at around $1 trillion and is estimated to grow at a compound annual growth rate of a massive 32% through to 2018. [7]

Looking at the gross transaction volumes handled by Alipay beyond Alibaba, expected growth in the third-party mobile payment market and Wal-Mart’s plans to accept Alipay across the board, we deduce that the retailer has an incredible opportunity to increase its potential customer base. However, Wal-Mart may not gain as much by adding Alipay to its acceptable payment modes than it would have lost if it had not, given that most of its competitors already accept Alipay. Although this partnership is an important step for Wal-Mart’s sustainability in China, we believe that the retailer was a little late in realizing the opportunity at hand. Now, rather than leading the way, Wal-Mart would be catching up to its competitors. Nonetheless, better late than never.

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Notes:
  1. Alibaba’s Financial Arm Partners With Wal-Mart to Grow Alipay Adoption, The Street, May 13 2015 [↩]
  2. Will we Witness a Raging War Between UnionPay & Alibaba in Near Future, Let’s Talk Payments, Jan 14 2015 [↩]
  3. Wal-Mart stores accept Alipay China, internet Retailer, May 13 2015 [↩]
  4. Wamart Global CEO Commits to Investment in China with 115 New Stores by 2017, Walmart, Apr 29 2015 [↩]
  5. Wal-Mart’s China syndrome is a symptom of international woes, Reuters, Feb 21 2014 [↩]
  6. Walmart’s Q4 fiscal 2015 earnings transcript, Feb 19 2015 [↩]
  7. China Mobile Payment Market Insights in 2014, China Internet Watch, Mar 25 2015 [↩] [↩]
  8. Alibaba’s Ma: financial services IPO ‘definite’, eyes China mainland listing, Reuters, Nov 11 2014 [↩]
  9. Alibaba’s filings [↩]
  10. Alibaba’s Gross Merchandise Volume Continued to Grow, Yahoo Finance, Mar 23 2015 [↩]