Wednesday, May 20, 2015

BABA and WMT – A Perfect Marriage In the Making?

A partnership between BABA and WMT could change the world's retail landscape, both online and off

Alibaba Group Holding Ltd (NYSE:BABA) has struggled for traction on the New York Stock Exchange as BABA stock is down more than 5% since Alibaba’s historic initial public offering last September.

On opening day, BABA jumped 38% to close at $93.89 and continued rocketing upward for almost a full two months. BABA stock reached a high of almost $120 per share in November 2014 but has since plummeted more than 22% to about $88 per share.

On May 7, shortly after BABA stock dipped below $80 for the first time, management announced plans to replace Alibaba’s CEO, Jonathan Lu. Alibaba’s COO, Daniel Zhang, took the reigns on May 10, along with “a further management shuffle that brings in a wave of younger leaders.”

Zhang laid out his plans for the future of BABA, describing the need to globalize by investing in overseas operations and expanding Alibaba’s workforce to include talent from all over the world.

Archrivals Working Together


In a turn of events that’s interesting for Wal-Mart Stores, Inc. (NYSE:WMT) shareholders and Alibaba shareholders, WMT and BABA announced a partnership this week allowing Walmart customers in China to pay for purchases with Alipay, BABA’s proprietary mobile payment system.

No other agreements were announced. So, the extent of Alibaba’s collaboration with Walmart appears limited to the Alipay service. Cash-back incentives were mentioned as an effort to entice Walmart customers to use Alipay, but it’s unclear whether BABA or WMT will be funding the program.

Looking exclusively at the Alipay arrangement, Walmart seems to be a much larger beneficiary, as its 400 stores in China have struggled to maintain adequate profit margins. WMT has grown to the the largest brick-and-mortar retailer in the world with 11,000 store locations in 27 countries and nearly $500 billion in annual revenue.

On the flip side of that coin, Alibaba has grown to be the world’s largest e-commerce retailer with $12.3 billion in annual revenue. In the U.S., Amazon.com, Inc. (NASDAQ:AMZN) still wears the crown, but from a global perspective, BABA is the true e-commerce king.

What Can BABA and WMT Shareholders Expect?


Investors holding BABA or WMT stock probably won’t see a difference in either of the two as a result of the digital payment agreement. For one, the partnership is limited to Walmart stores in China, which represent a mere fraction of the discount retailer’s total worldwide presence.

Even if Chinese customers begin using Alipay at Walmart, stores likely won’t experience increases in traffic or total sales simply because of the presence of an additional way to pay for purchases. After all, Walmart has only 400 locations in China, while Alipay is accepted at more than 40,000 other retail stores in the country.

Adding Walmart to the list of available Alipay retailers won’t help BABA stock, either. Considering thatWalmart’s Chinese customer base decreased 5.7% year over year in 2014, absence of Alipay was probably not at all responsible, and Alipay’s presence probably won’t reverse the trend. If BABA is looking for its WMT agreement to translate into increased revenue, it’s looking in the wrong place.

Don’t Give Up On Them Just Yet


If you already own shares of WMT or BABA, don’t dump them. Both Walmart and Alibaba are global retail giants — WMT is the largest brick-and-mortar retailer in the world, BABA is the largest e-commerce retailer. China represents one of the world’s largest retail markets, and while Alibaba is top dog in the country, Walmart’s presence is minuscule and WMT has a significant opportunity to expand.

On the other hand, Walmart dominates in the U.S., while Alibaba has barely scratched the surface. The digital payment arrangement is just a toe in the water for both companies and, if successful, could lead to further collaboration and expanded partnerships.

With the new BABA CEO’s focus on globalization and international growth, counting WMT as an ally could prove useful down the road.

Article originally appeared on InvestorPlace (05/20/2015)