Why does Walmart want to buy TikTok? A clue: the way adolescents in China consume

Walmart joins Microsoft to buy TikTok 1:26

(CNN Business) - Walmart is a 58-year-old American company known for large stores that sell everyday items, casual clothing, groceries and televisions.

TikTok is a Chinese-owned app that in just a few years has wowed hundreds of millions of teens with its entertaining dance videos, lip-syncing performances, and comedy routines.

At first glance, the two couldn't be more different. That's why Walmart's announcement that it would join Microsoft in its bid to buy TikTok's US operations came as a surprise to many.

But analysts who have seen the meteoric rise of social media commerce in China, a mix of social media activity and frenzied online shopping, say Walmart's interest in TikTok makes perfect sense.

The Chinese version of TikTok, known as Douyin, is one of several apps in the country that have taken advantage of the increasing number of Chinese shoppers who like to buy things on social media platforms.

Users of rival Kuaishou, owned by Douyin and Tencent, for example, can purchase products after watching short videos about products. They tune in to live broadcasts of influencers selling everything from makeup to furniture. Users can ask influencers about products and get answers in real time, or they can click on deep discounts offered only in apps.

It is like a modern version of shopping through QVC or Home Shopping Network, but much more social and reduced to the screens of mobile devices.

"It's entertainment plus shopping," said Kitty Fok, CEO of market research firm IDC. "This is huge… this is an extremely large market."

The feature is a great revenue driver for Douyin and other applications, which generate revenue from advertising and commissions from products sold within the applications.

Social media commerce is growing rapidly

Social commerce in China was worth $ 186 billion last year, more than 10 times the value of sales made in the United States, according to market research firm eMarketer. The Chinese market is expected to grow 30% this year to $ 242 billion.

Walmart has already recognized the value of e-commerce when it comes to TikTok. The company said Thursday that its interest in the app stems from the way it has "integrated e-commerce and advertising capabilities into other markets," adding that TikTok could strengthen Walmart's access to consumers.

China's success with social commerce depends on the early and widespread adoption of advanced, mobile-friendly payment systems, something the United States is at least three years behind in implementing, said Eric Schiffer, CEO of Patriarch Organization, a technology-focused private equity firm. For Walmart to be very successful with TikTok, it would likely need to replicate that payment technology and encourage TikTok's mostly young audience to use it.

"The battlefield of this decade for Gen Z will be where they will spend their time," said Schiffer, "and being able to integrate payments is a critical piece to maximizing ROI on TikTok."

The US retailer is likely to think it can replicate at least some of China's runaway growth in the US market and get "millions of sellers and advertisers to drive commissions and online commerce," said Greg Paull, CEO of the firm. market research R3.

"More importantly, Walmart needs to attract Gen Z shoppers as its profile continues to age with the population," he added.

TikTok says it has around 100 million users in the United States. Worldwide, the app has around 690 million monthly active users, and nearly 70% of them are between the ages of 16 and 24, according to R3.

"On TikTok, Walmart has only 1.8 million followers, far fewer than [teen influencer] Loren Gray's 46 million, so there is only room to grow here," Paull said.

And owning TikTok could help Walmart fight more effectively against e-commerce giant Amazon, with whom it competes not only for direct sales but also for third-party sellers in its online marketplace and for advertisers.

"To the extent that TikTok adds more eyes to Walmart's e-commerce platforms, that would make Walmart more attractive to third-party sellers for both the online marketplace and as an advertising platform," said DA senior research analyst. Davidson, Michael Baker, in a note to investors. Thursday.

To this end, Microsoft may be the perfect partner in the deal, because it also has a fierce rivalry with Amazon in the cloud business.

Political considerations

TikTok and its Chinese parent company ByteDance, which also owns Douyin, have come under enormous pressure in the United States.

President Donald Trump issued decrees this month threatening to ban the app unless ByteDance sells it. The Trump administration says TikTok poses a threat to national security due to its ties to China. TikTok denies those accusations and is suing the Trump administration over the order, which it calls "heavily politicized." TikTok and ByteDance did not respond to a request for comment for this article.

The Trump administration's concerns about the security of TikTok data may be among the reasons Walmart decided to partner with Microsoft, rather than seek a deal individually. Unlike Walmart, Microsoft has a cloud service to store application data and technical knowledge to run a social network.

If the business succeeds, Microsoft has agreed to transfer all data of US TikTok users to the United States and to ensure that all data stored or backed up in other countries is deleted.

By joining forces, the offer from Microsoft and Walmart may be more compelling and more likely to receive approval from Trump, after he previously said he would support enterprise technology company Oracle by buying TikTok. Oracle founder Larry Ellison is a vocal Trump supporter, and CEO Safra Catz has donated to the president's re-election campaign.

"I think it's helpful in the sense that there is strength in the numbers - a combined offering from two very powerful and very American companies definitely helps," Global Data Retail Managing Director Neil Saunders said of the Microsoft-Walmart offering. . “[Walmart is] seen as a great American company by the current administration and probably more widely as well. That certainly works in his favor.

The Trump administration is unlikely to oppose a Microsoft-Walmart offer due to the silent efforts of both companies to build bridges with the current administration, Schiffer said.

Microsoft, in particular, "has done a smart job in managing its public affairs relationship with the administration," Schiffer said, "so Microsoft will not be excluded from this deal."

This week, Kevin Mayer, the former Disney executive who took over the roles of TikTok CEO and ByteDance COO less than four months ago, resigned. He noted that "the political environment has changed dramatically" and with it the global role to which he signed.

Walmart confirmed that it was interested in buying TikTok within hours of Mayer's resignation.

Clare Duffy and Brian Fung of CNN Business contributed reporting.

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