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With TikTok deal shelved, Walmart must double down on reaching Gen Z – analysts

With Walmart Inc.'s plans to invest in video-sharing app TikTok Inc. now on hold indefinitely, the Arkansas-based retailer must look for other ways to grow its nascent advertising business and reach younger consumers, experts say.

The Wall Street Journal reported Feb. 10 that Walmart and Oracle Corp.'s plans to buy TikTok's U.S. operations from China's Beijing Byte Dance Telecommunications Co. Ltd. have been shelved as newly elected President Joe Biden reviews the previous administration's plans to address potential security risks from Chinese tech companies. Walmart spokesperson Randy Hargrove declined to comment on the WSJ article and referred questions about the potential TikTok deal to the Biden administration, which could not be reached.

Analysts said they are not surprised the deal is in jeopardy, given how it dragged out for months since first announced last year. But they believe the dissolution of the deal limits what would have been a compelling opportunity for a legacy brand like Walmart to boost its digital advertising business and gain unique access to young adults in Generation Z, the majority of whom are still under the age of 18. TikTok is a top platform for members of that generation.

"The TikTok investment would have allowed Walmart to very quickly reintroduce themselves to the generation and stay sort of front-of-screen," said Jason Dorsey, president and lead researcher at The Center for Generational Kinetics, a Gen Z and Millennial research and strategy firm.

But the Biden administration's decision to shelve the Walmart/Oracle/TikTok deal "reflects the deep level of knowledge and attention to detail in the Biden national security team," said Aynne Kokas, an assistant professor of media studies who focuses on Sino-U.S. relations in the media and technology industries. "My hope is that this decision suggests a deep commitment to careful tech oversight in the new administration."

During a Feb. 10 press briefing, White House press secretary Jen Psaki said the Biden administration is "comprehensively evaluating the risks to U.S. data, including from TikTok," but that no final decisions around the video-sharing application have been reached.

With the TikTok deal falling apart, Walmart will explore new ways to reach Generation Z consumers, experts say. Although most members of Gen Z, born from approximately 1996 to 2015, are too young to have credit cards, they have tremendous influence in the e-commerce space, both by getting their families to make purchases online and informing the trends on what people want, Dorsey said.

Walmart could invest in technologies that integrate with social media and collaborate with online "micro" influencers who only have a few thousand followers but have garnered trust among Generation Z, he said.

"Walmart is going to have to double down on their digital strategy, particularly as you look at social media platforms, and continue to increase their effectiveness in analytics to make sure that they are reaching Gen Z in the right way, on the right platform, at the right time in the most personalized way," Dorsey said.

Michael Baker, managing director with D.A. Davidson, said further investments in Walmart's advertising business will be critical to improving Walmart's growing but still unprofitable e-commerce business.

"They still lose money in their e-commerce business, as of the last public commentary on it," Baker said.

But adding higher-margin businesses to their online ecosystem, including advertising, helps offset some of those losses, Baker added.

Walmart's efforts to reach younger consumers will be imperative as competitors like Amazon.com Inc. successfully engage with young consumers. Dorsey said Amazon has been able to successfully attract Generation Z with its Alexa devices. Etsy Inc. is also popular with Generation Z, along with eBay Inc., which draws younger consumers who want to sell items on that platform.

Dorsey estimates Walmart has a roughly three-year timetable to gain awareness among members of Gen Z and persuade them to purchase online as they come of age. That's doable, he said, especially given that the company's pursuit of TikTok shows it is "not afraid to take risks."

Meanwhile, Oracle has not provided any further details about its part in the agreement to acquire a stake in TikTok. The software company's representatives declined to comment for this article.

A TikTok partnership would have allowed Oracle to build further momentum for the software company's burgeoning cloud-computing business and better compete with market leaders Amazon Web Services Inc. and Microsoft Corp.'s Azure, analysts previously told S&P Global Market Intelligence.