The techno-political struggle between the United States and China over Beijing-based ByteDance’s short-video sensation TikTok continued on August 28, when China’s Ministry of Commerce declared that ByteDance’s content recommendation algorithms, viewed by many as the most valuable technology within the firm, would fall within an updated list of export controls.
ByteDance swiftly said that it would fully comply with the export restrictions to protect TikTok’s most valuable asset from being transferred to external parties through a forced sale.
Since then, American enterprise software giant Oracle (NYSE: ORCL) has emerged as the “trusted technology partner” that will invest in TikTok Global. If approved, the deal would give the company a 12.5% stake in the newly created firm, rather than a full acquisition.
Meanwhile, another American bidder, retail giant Walmart (NYSE:WMT), has tentatively agreed to buy 7.5% of the proposed TikTok Global, with chief executive officer Doug McMillon filling a spot on the company’s board.
But why would a retail giant be interested in a viral short-video app?
Walmart could leverage TikTok’s potential to rejuvenate the company’s stuttering e-commerce operations, which generated losses to the tune of USD 2 billion in 2019. Additionally, the scope of investment in TikTok is not necessarily limited to the firm’s business in the US, Canada, Australia, and New Zealand as initially supposed.
The company said in a statement that the TikTok deal would “provide Walmart with an important way for us to expand our reach and serve omnichannel customers as well as grow our third-party marketplace, fulfillment and advertising businesses.”
At the moment, Walmart’s online business is struggling to keep up with the likes of Amazon in the United States and Alibaba in China. The company’s expansion into India’s wholesale market has stalled. To stretch beyond its big-box retail business that chiefly appeals to an older demographic, it needs to slide its business into the habits and consumption patterns of younger shoppers.
The retail giant’s average shopper is 47 years old. On the other hand, TikTok counts over 100 million Americans as monthly active users, 35.4% of which are between 18 and 24 years old. Plugging into a social, video-based content approach to e-commerce could rejuvenate Walmart’s status among the next generation of American shoppers who are transitioning from students and young adults to full-fledged consumers with disposable incomes.
A move like this could have global implications. Outside of its home market, Walmart could leverage TikTok’s massive user base to invigorate its e-commerce operations abroad by integrating TikTok’s troves of data into a social commerce model in major international markets, including India and China.
India is a fertile market for social commerce
Up until the Indian government banned TikTok in late June, the app had gained huge popularity in the country, amassing 500 million downloads to become the firm’s largest market globally. Meanwhile, Walmart owns a majority stake in Indian e-commerce behemoth Flipkart, which has 100 million registered customers, according to the Flipkart’s website.
As e-commerce continues to grow in India, driven by increasing internet penetration, digital payment adoption, and disposable income among a young, mobile-savvy population, Flipkart is said to be eyeing an IPO in early 2021 in either Singapore or New York.
TikTok began to dabble in social commerce in late 2019, a move that had significant potential to monetize the short-video app’s young user base in India, where users were already well adjusted to e-commerce. India’s e-commerce players took note, as Voonik, Snapdeal, and Flipkart-backed Myntra all began advertising on TikTok in 2019.
In China, the gamification of e-commerce platforms has already taken off, begging the question of whether the collective efforts of TikTok, Walmart, and Flipkart in India can execute a similar strategy by infusing its e-commerce sales channels with a heavy dose of entertainment?
The Bangalore-based e-commerce giant boasts video offerings following partnerships with production houses including Studio Next, Frames, and Sikhya Productions, while it has a space on its app where key opinion leaders (KOLs) and influencers can market products by speaking directly to their viewers.
Flipkart waded even deeper into entertainment with the creation of Flipkart Originals in 2019, which produces mini-feature films. Walmart’s investment in TikTok could provide Flipkart with key user data to fuel the adoption of social commerce in India and supercharge their entertainment business.
Catching up on China’s social commerce trend
Walmart’s China operations began with the opening of a Sam’s Club in Shenzhen in 1996, and have since then grown to include 435 retail locations largely concentrated in the country’s first- and second-tier cities. Employing around 96,600 associates in China, the Arkansas-based retailer announced that it wants to open another 500 stores and warehouses in the country in the next five to seven years.
In early 2017, Walmart China’s strategy shifted from massive hypermarkets to more compact local outfits to boost the efficiency of its stores by embedding them within communities. But it was clear that the future lies in digital channels, most notably China’s wave of e-commerce adoption.
Despite ferocious competition in China, Walmart’s growth in the country outpaces its worldwide average, with 6.3% revenue growth in the third quarter of 2019, compared to 2.5% globally. Last year, Walmart launched its own WeChat mini program to move further into China’s e-commerce market.
Since Walmart’s entrance into China, e-commerce has taken off, and the company has partnered with JD.com (HKG: 9618) for its e-commerce business. Last year, Walmart launched its own WeChat mini program to move further into China’s e-commerce market. Then the advent of social commerce tapped into a new form of retail, defined by group-buying platform Pinduoduo along with e-commerce livestreaming platforms like Kuaishou, and most notably, ByteDance’s domestic version of TikTok, Douyin.
With Douyin having just surpassed 600 million DAUs—about 40% of China’s population—more and more brands are flocking to the platform to promote and sell goods directly to consumers.
Although TikTok’s short-video app is seen mainly as an entertainment platform, the reality is short-video and e-commerce are blending together. In China, ByteDance’s Douyin and Kuaishou have both managed to monetize their user bases by effectively integrating e-commerce functions. Pinduoduo’s gamification of online shopping and focus on an engaging and entertaining user experience led them to brand their company strategy as “Costco + Disney.”
Chinese short-video app Kuaishou has even outperformed Douyin in terms of e-commerce conversions, despite its smaller user base, largely because of a down-to-earth connection with China’s less developed areas. This authenticity bred trust among its users, which the company has harnessed into a successful e-commerce business with Kuaishou Xiaodian, or “Kuaishou Shop.”
The synergy between ByteDance’s short-video products and e-commerce has been increasing as the company commits more resources to enhance its e-commerce capabilities.
Walmart’s investment in TikTok Global opens up a partnership with ByteDance, as the Beijing-based firm aims to create synergy between its core short-video products and e-commerce sales. The two conglomerates have aligned interests in mobile retail, so they have a strong incentive to leverage each other’s strengths to increase consumer stickiness, merging TikTok’s entertaining content with Walmart’s strong position in retail and e-commerce, to capture and retain legions of young shoppers already accustomed to the mobile-first lifestyle.
Overlapping markets
It’s not just the US, China, and India where Walmart can leverage its stake in TikTok Global. Walmart’s largest international market is Mexico, home to over 20 million TikTok users. Walmart also operates over 600 stores serving 18 million customers a week in the United Kingdom, where TikTok projects to surpass 10 million users by next year.
By riding on the virality of TikTok, Walmart hopes to develop offerings that could capture the next generation of global consumers, in the same way that TikTok has captivated an entire generation of social media users.