What Walmart might want from a TikTok tie-up

Investing

Low-fi video clips of teenagers breakdancing and lip-syncing would seem to have little relevance to Walmart, the world’s biggest bricks-and-mortar retailer. Yet the Arkansas-based chain, better known for selling cereal, soap and shoes in the suburbs than for ventures in digital media, is preparing to invest billions of dollars in TikTok.

Walmart is teaming up with Microsoft to bid for the US operations of the China-owned video-sharing app, which President Donald Trump has claimed threatens national security and has vowed to shut down unless it is sold to an American company by mid-November.

The quintessentially American duo of Walmart and Microsoft stand a good chance of satisfying the White House. Why the retailer wants to make such a departure from its core business in the first place is less apparent. “It’s kind of come out of left field,” said Ken Perkins, president of the Retail Metrics consultancy.

While Walmart has provided few details of its rationale, in confirming its intentions it highlighted TikTok’s potential to expand two particular parts of the US retailer’s business: advertising and its online third-party marketplace. Ecommerce industry experts believe the success of both could be critical to enabling Walmart to compete successfully online against the might of Amazon.

Walmart’s net sales of $520bn last year were almost double Amazon’s, powered by a global network of about 11,500 stores. But while its ecommerce business has expanded rapidly, and its kerbside collection services have proved particularly popular during the coronavirus pandemic, the retailer remains a digital tiddler compared with its Seattle-based rival.

It has had mixed successes with various digital ventures, which include an earlier push into video. Walmart, once a big seller of DVDs, bought Vudu, a movie streaming service, a decade ago but sold it to Fandango this year after it failed to take off in the way that Netflix and Amazon Prime Video did.

Line chart of Revenues (annual % change) showing Walmart has played second fiddle to Amazon's surging growth

Despite such setbacks, Doug McMillon, chief executive, is clear that Walmart needs to keep investing online to realise its “omni-channel” ambitions. An acquisition of TikTok, albeit alongside Microsoft, would be one of its boldest experiments yet.

“It would be quite an aggressive strategy [for Walmart] — they’re really thinking outside the box,” said Mitch Bailey, chief operating officer of Etailz, which helps companies sell through online retailers. “But there could be merit in it.”

The appeal is in the extraordinary digital reach of TikTok, which has more than 100m active US monthly users. They are predominantly young, tech savvy and likely to shop online. An acquisition would give Walmart the chance to “get more eyeballs”, said Charlie O’Shea, retail analyst at Moody’s.

In turn, that could help Walmart expand its digital “marketplace”, which allows third-party vendors to sell their own products through the retailer’s website and mobile app. Walmart offers about 75m items online, mostly through its marketplace. That is a fraction of what is available on Amazon.

Converting video sharers into shoppers — at least at a high enough rate to justify Walmart’s investment — would be far from straightforward, however.

The retailer could try to steer TikTok users to its own site, but too blatant an attempt could be problematic. “A lot of users will be wary of it being linked to big corporate interests and will be on guard against being ‘used’,” Mr Perkins said.

A tie-up between TikTok, Walmart and Microsoft could work in other ways, though. One option would be for TikTok to develop an online US store of its own, which would have the video app’s branding but be powered by Microsoft’s technology and Walmart’s logistics.

Other social media platforms, such as photo-sharing app Instagram, had pushed successfully into online shopping, Mr Bailey noted. Indeed TikTok’s Chinese version, Douyin, has itself made strides in ecommerce. 

Chart showing that TikTok has been downloaded more than 2bn times

TikTok could also help Walmart expand its developing in-house advertising business. Selling digital ads helps Walmart mitigate the losses it makes online. “It’s early days for Walmart and advertising but this could give them new capabilities,” said Oliver Chen, analyst at Cowen.

Walmart said in a statement: “The way TikTok has integrated ecommerce and advertising capabilities in other markets is a clear benefit to creators and users in those markets.” 

It remains far from certain that Walmart and Microsoft will get their hands on TikTok’s US business. They face competition from Oracle, which is bidding alongside a group of US investors including General Atlantic and Sequoia.

Still, Wall Street gave an early signal that it welcomed the prospect of Walmart becoming a part owner. The retailer’s shares rose 4.5 per cent on Thursday to a new record, giving it a market capitalisation of $387bn.

“If they are able to bring this in and successfully integrate it . . . to have millions of young users in their orbit, could be potentially invaluable,” said Mr Perkins. “But they’re going to have to do it carefully.”

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