A man walks outside of a Walmart in China. Tomohiro Ohsumi | Bloomberg | Getty Images

Walmart may not be the first name that comes to mind when most consumers think about e-commerce, but the rapid rise of delivery services in China is pushing the U.S. retailer to new innovations in Asia's largest economy. E-commerce accounts for more than 20 percent of retail sales in China, the highest and fastest growing penetration rate in the world, according to Mary Meeker's widely-followed 2018 internet trends report. With that challenge in mind, the Arkansas-based company is trying an experiment: A smaller store, focus on Chinese lower-tier cities and a new sales model with Chinese logistics company Dada-JD Daojia. It's the latest move in Walmart's two-year partnership with the company. Dada-JD Daojia is a merger between a network of 5 million registered delivery people and e-commerce company JD.com's two-hour supermarket delivery service. In August, Walmart and JD.com invested $500 million in the logistics company — JD.com had a nearly 50 percent stake in Dada-JD Daojia as of last December.

When Walmart reported fiscal third quarter earnings on Nov. 15, the company said more than 230 of its stores in China offer one-hour delivery through JD Daojia — that's more than half the number of Walmart stores in the country. But it's a tough market as other retailers are also playing the delivery game, and some such as Carrefour have also partnered with Dada-JD Daojia. JD.com's rival, the far bigger Alibaba, has opened more than 70 sleek Hema grocery stores in China that are known for delivery within an hour or two. They offer not only fresh produce but also made-to-order dishes such as sauteed spicy crayfish. In the quarter ended Sept. 30, online sales accounted for more than 60 percent of total sales for Hema locations open for more than 1 1/2 years.

Right now, Hema is focused on China's larger cities, while Walmart's experiment begins in the relatively smaller city of Chengdu in Sichuan province.

'Next Generation Store'

The new store Walmart opened there this month is roughly 5,000-square-meters large, nearly half the size of a typical Walmart "hypermarket," according to a release. The retailer also said it halved the amount of general merchandise to focus on fresh produce. Customers can use a mini program within China's ubiquitous WeChat messaging app to check out digitally — a function Walmart began rolling out in April that now has more than 17 million users. Alternatively, they can get products delivered within an hour if they live within three kilometers (1.86 miles) of the store. Packing time has been significantly cut down — potentially to just a few minutes — due to the compact layout and integration with a customized warehouse management system from Dada-JD Daojia, according to Yang Bo, national head overseeing major customer partnerships, at Dada-JD Daojia. As a result, Yang said an order could be delivered in just half an hour, while the cost of human labor per order also goes down.

The Next Generation Store is one of our future strategic focuses, and we look forward to replicating the learnings across the country once the pilot is successful. Bernardo Perloiro Senior Vice President and Chief Operations Officer for Walmart China Stores

The centralized warehouse management system tracks inventory and covers every step of the process, from the time the customer places an order to delivery, Yang said. He added that analyzing such data can help improve delivery efficiency. The new Walmart in Chengdu has also adjusted shelf height and expanded leasing area for selected brands to about 4,000 square meters, the company said. It has also organized items according to themes — such as placing children's clothes with baby food, rather than separating them by type. "The Next Generation Store is one of our future strategic focuses, and we look forward to replicating the learnings across the country once the pilot is successful," Bernardo Perloiro, senior vice president and chief operations officer for Walmart China Stores, said in a release.

Walmart's China footprint

Walmart says on its website it has 424 retail units in China, a market the company first entered in 1996 with the opening of a supercenter and a Sam's Club in Shenzhen. Sam's Club is a membership-based line of stores selling goods in bulk at wholesale prices. However, the big-box store model struggled in China because its requirements for a large space and a car-owning population weren't that practical in China, Yang said. "To buy something and keep it for a month in the refrigerator, this is not something Chinese people are accustomed to," he added. But last December, a Sam's Club in Shenzhen began testing delivery with Dada-JD Daojia, and the growth in orders was so great that the feature is being rolled out at locations in Beijing, Shanghai and other large cities, Yang said. As of Feb. 28, Walmart was JD.com's third-largest shareholder by common shares outstanding with a 10.1 percent stake, according to S&P Capital IQ. The database showed Chinese technology giant Tencent had the largest stake at nearly 17.9 percent, while JD.com CEO Richard Liu was second at 16.6 percent. Liu was arrested in the U.S. this year on allegations of rape but has been released.