INTERNET: Walmart Sacks Yihaodian Founders Amid Slow Progress

Bottom line: Walmart’s dismissal of Yihaodian’s 2 top executives marks a major shake-up due to the unit’s disappointing performance, and could be followed by closer integration with Walmart’s own China operations.

Yihaodian in management shake-up

A major shake-up has just occurred at Walmart’s (NYSE: WMT) China e-commerce unit, reflecting its disappointing progress 3 years after the US retailing giant took control of local upstart Yihaodian. The shake-up has seen the sudden resignation of Yihaodian’s 2 founders, Yu Gang and Liu Junjun, who were also the chairman and CEO, respectively. Yihaodian confirmed the departures, and said they were announced after a high-level Walmart official came to visit the company. (Chinese article)

The reports say Walmart issued a nicely worded statement on the matter, saying “A company’s founders will naturally leave after a certain stage of development, and we wish them well”. But the fact of the matter is that Yihaodian has been quite a disappointment for Walmart, which took control of the company in 2012 and has made it the central focus of its e-commerce strategy in China.

Many companies track e-commerce market share in China, and nearly all of those show that Yihaodian is hardly a top player despite big investments and support from its powerful parent. One list said Yihaodian now ranks as China’s 10th largest player with a scant 0.7 percent market share. It’s no surprise that the list is lead by well-known Alibaba (NYSE: BABA) and (Nasdaq: JD), which control 40 percent and 15 percent of the market, respectively.

Walmart can hardly hope to compete with those 2 giants. But it must certainly feel some disappointment to see Yihaodian ranked behind names like struggling online clothing seller Vancl, and even the far lower-profile American rival NewEgg. Many people still write about Yihaodian, but much of the attention is due to its connection with Walmart and also its big spending on advertising.

I’ve personally followed Yihaodian since Walmart first bought a stake, and had big hopes for its development after the tie-up. Unlike other global rivals, Walmart was one of the few major western retailers that recognized the importance of e-commerce in China relatively early and has taken big steps to build up that part of its business. Partly as a result, it has fared better than rivals like Carrefour (Paris: CA) and Tesco (London: TSCO), which are struggling or have even withdrawn from the market due to the e-commerce challenge.

Failure with Founders

But Walmart’s bet on Yihaodian clearly hasn’t lived up to the company’s hopes. Walmart chose the relatively safe approach of leaving the company’s founders in charge for the first 3 years after its purchase. It probably took that tack in hopes of avoiding the kinds of poor results seen by names like Yahoo (Nasdaq: YHOO) and eBay (Nasdaq: EBAY), which made major China purchases about a decade ago and then quickly replaced the company founders with their own managers.

I probably would have commended Walmart on its early decision to keep Yihaodian’s founders in control, since both Alibaba and have thrived in large part due to the continued control by their savvy founders, Jack Ma and Richard Liu. But clearly Walmart was growing impatient with Yu Gang and Liu Junjun, and I expect we’ll see the pair soon replaced by someone with a more corporate background, possibly from Walmart’s own China operations.

All of this raises the next question of what’s ahead for Yihaodian and Walmart’s broader e-commerce strategy in China. I expect that Walmart’s next big move could be an outright acquisition of Yihaodian, since it now owns just 51 percent of the company, and then a rapid integration of the operation with its own traditional retailing business. We could even see it make some moves in the Shanghai free trade zone (FTZ) similar to what Amazon (Nasdaq: AMZN) has done to take advantage of its international connections (previous post), as it tries to jump-start the disappointing Yihaodian.

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