Wal-Mart’s e-Commerce Investment Taps Chinese Retail Growth
Wal-Mart (NYSE:WMT), which competes with other retailers like Costco (NASDAQ:COST), Target (NYSE:TGT) and Amazon (NASDAQ:AMZN), has been strategically expanding into China since opening its first Supercenter and Sam’s Club in 1996. The rising purchasing power of Chinese consumers and improving economy bodes well for retail sales growth.
Our price estimate for Wal-Mart stands at $65.42, roughly 20% ahead of market price. We estimate that the company generates about 32% of its stock value from Wal-Mart international operations.
Although Wal-Mart has traditionally expanded into China by opening stores and joint ventures, a more recent move indicates that it may be interested in capturing e-commerce sales as well. Chinese e-commerce consumer electronics seller 360buy.com has stated that Wal-Mart, along with a few other investors, has contributed a combined total of $500 million to support 360buy.com’s fast growing online retail business. [1]
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What Prompted Wal-Mart’s Move?
China’s e-commerce market is accelerating at an explosive rate. The country boasts the largest number of internet users in the world (about 420 million) and is expected to witness about 27% average annual growth in its online retail market. [2] Consequently this market is expected to increase from about $50 billion in 2010 to almost $160 billion in 2015. [2]
360buy.com is one of the fastest growing online retailers and is expected to reach sales figures of close to $1.5 billion in 2010 compared, well beyond its $200 million in 2008. [3] Considering that retail sales are increasingly shifting online, Wal-Mart’s investment makes sense.
Where Will Future Capital be Directed?
Since the $500 million is a combined investment from several retailers, Wal-Mart’s investment contribution could be low. But its a start.
Two questions emerge here: 1) Will Wal-Mart invest heavily in pure-play online retailers in China going forward? 2) Will Wal-Mart continue with its brick-and-mortar expansion in China by opening stores?
It could be both.
Wal-Mart is unlikely to do away with its traditional store format in international markets or the US. While specialty products like electronics are often purchased over the internet, Wal-Mart’s product catalog spans a much wider range. Its appeal to the everyday needs of the consumer will continue to make its stores profitable and, going forward, the majority of its capital will likely be directed to this area.
Still, we don’t expect Wal-Mart to ignore the upside of pure-play online retailers, particularly in large markets like China. The company is likely to strengthen its own online platform to compete, but may face headwinds from existing (and fast-growing) online retailers in China.
We expect Wal-Mart to invest more in pure-play online retailers in the near future, which could accelerate revenue growth in international and domestic operations
See our company breakdown and estimates for key drivers of Wal-Mart’s stock value in the display above.
You can see the complete $65.42 Trefis price estimate for Wal-Mart’s stock here.
Notes:- Wal-Mart invests in China e-commerce retailer 360buy.com, Yahoo News, 28th Dec 2010 [↩]
- 360buy Attracts Investment, The Wall Street Journal, Dec 29 2010 [↩] [↩]
- Wal-Mart Moves to Invest in China Online Retailer, The New York Times, Dec 27 2010 [↩]