Tencent and Walmart Turn up the Heat on Alibaba

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Walmart (NYSE: WMT) recently dropped Alibaba (NYSE: BABA)-linked Alipay in all its stores across western China after inking an exclusive payments partnership with Tencent's (NASDAQOTH: TCEHY) WeChat Pay. This move could deal a blow to Alibaba, which is trying to counter Tencent's aggressive retail expansion.

Alipay and WeChat Pay are the two most popular mobile payment platforms in China. AliPay controls 54% of the market, while WeChat Pay controls 40%, according to research firm Analysys. Many retailers accept both types of payments, but Alibaba and Tencent have been trying to score exclusive deals to gain market share.

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Alibaba is the largest e-commerce company in China, but Tencent can leverage the strength of WeChat, the top messaging app in China with almost a billion monthly active users, to gain ground. That's why the Walmart deal is significant -- it indicates that major retailers are willing to choose sides in this escalating war.

Why Walmart is siding with Tencent

Walmart currently operates 443 stores across China, including 406 Walmart Supercenters, 18 Hypermarkets, and 19 Sam's Clubs. Walmart's exclusive deal with Tencent doesn't cover eastern China, so its stores in major urban centers like Beijing and Shanghai will probably still accept both Alipay and WeChat Pay. But Walmart still operates plenty of stores in the west.

Walmart's alliance with Tencent isn't surprising if you recall its relationship with Tencent and JD.com (NASDAQ: JD), Alibaba's biggest e-commerce rival. Walmart and Tencent are both top investors in JD. Last year, Walmart and JD merged their membership systems so shoppers can receive the same discounts and perks at both retailers. They also launched a new logistics system which lets JD fulfill its orders from Walmart's inventories.

JD merged its customers' shopping history with Tencent's data on WeChat users, and uses that data to make suggestions for purchases and help vendors promote their products. JD and Tencent also co-invested in Vipshop (NYSE: VIPS), which ranks a distant third in the online marketplace market, and Better Life, a Chinese retail conglomerate which owns convenience stores, supermarkets, and department stores.

Meanwhile, Alibaba remains a major threat to Walmart with its sprawling online marketplaces (Taobao and Tmall) and rapid fire investments in brick-and-mortar players like Intime Retail, Sanjiang Shopping Club, Lianhua Supermarket, and Easyhome. Therefore, Walmart relies heavily on its partnerships with JD and Tencent to hold Alibaba at bay.

Should Alibaba be worried?

Walmart likely dropped Alipay in its stores in western China to gauge its shopper response ahead of a nationwide rollout. Walmart has plenty of reasons to help Tencent and JD instead of Alibaba, so it could be eager to dump Alipay across all of its stores.

As the 800-pound gorilla in online retail, Alibaba isn't beloved by brick-and-mortar retailers. That's why Alibaba uses big investments in companies like Lianhua, which owns thousands of brick-and-mortar stores, to expand its Alipay ecosystem.

However, retailers like Walmart, which don't want to feed Alibaba, will likely find Tencent and JD to be more accommodating partners. Alibaba definitely hasn't won this battle yet. Between 2014 and 2017, Tmall's share of China's B2C (business-to-consumer) market slipped from 55% to 51%, according to Analysys International Enfodesk. During the same period, JD's share soared from 18% to 33% -- thanks to Tencent's support, alliances with other retailers, and the failures of smaller B2C marketplaces.

The bottom line

On its own, Walmart's deal with Tencent isn't surprising, and it isn't a game-changer. But when we view it in the context of Walmart's alliances with Tencent and JD, as well as Tencent's ongoing battle against Alibaba, it makes perfect sense. If other major retailers follow Walmart's lead, Alibaba might need to shore up its defenses.

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Leo Sun owns shares of JD.com and Tencent Holdings. The Motley Fool owns shares of and recommends JD.com and Tencent Holdings. The Motley Fool has a disclosure policy.