Walmart’s existential dilemma

The sound and fury around the Karnataka elections may have overtaken the hype and frenzy around Walmart’s dramatic $16 billion acquisition of Flipkart. But it hasn’t stopped analysts and columnists from questioning the rationale of the deal. This deal is five times bigger than Walmart’s biggest acquisition to date. So what made Walmart pay a king’s ransom for an entry into the Indian e-commerce market? Especially since the sustainability of Flipkart’s business model has been the subject of considerable debate over the years. It begs the question: Has Walmart bitten off more than it can chew?

Let’s step back. Global multinationals have their own peculiar ways of working. Retail, particularly, has always been a local business. And unlike the fast-moving consumer goods industry, retailers such as Walmart, Carrefour and Tesco have been slow to spread themselves around the world.

And in particular, Walmart’s track record in building its international business has been spotty. The litany of setbacks is long and well documented. It has been forced to exit from many global markets: Korea, Germany, Brazil, and now, the UK. It has either been outwitted by local retailers or failed to understand the shopping habits of local consumers. In China, particularly, it has tried many times to learn from its failures. No one is quite sure it has fully learnt its lessons.

Much of its challenges are linked to its deeprooted culture. Despite being a large multinational corporation, Walmart has struggled to grow beyond its somewhat insular roots in its Bentonville, Arkansas HQ. Many of its senior leaders today have risen through the ranks, from being cart pushers and check-out clerks to senior executive roles. While it has nurtured strong cultural values of frugality and being grounded, the senior leadership’s ability to decode big shifts in the home market beyond Arkansas has been questionable. They have failed to spot the emergence of new communities such as the Hispanics and Indians, across various local catchments—and reflect the new buying patterns in their merchandise. Even when the changes were spotted by leaders from outside their home market, effecting the changes inside the infamous bureaucracy at Bentonville has taken huge effort. Unlike Target, Walmart has also had to shake off its dowdy in-store experience. The result: Its core US market is reaching saturation, with growth down to 2 per cent. Same store growth has all but slowed down, leading to many Walmart stores across the US being shut down.

And in this scenario, Amazon’s tech enabled e-commerce platform has proven to be Walmart’s Achilles heel. It isn’t as if Amazon has specifically targeted Walmart. On the contrary, it simply concentrates on serving a new breed of well-heeled customers who love its endless aisles, home delivery, Prime membership, the simplicity of its online buying process—and now, more lately, the shopping experience provided by its brick and mortar stores such as Amazon Go and Whole Foods.

In the next three years, it is expected that Amazon will overtake Walmart’s US business in sales. The stock market has already picked a winner. And Walmart is a bit like a deer caught in the headlights. Its transition to online commerce has been painful. It tried kickstarting its online avatar on its own, but it soon realised that it needed a new cadre of leaders who understood technology. Its acquisition of Jet.com, catapulted Jet’s founder Marc Lore to take over the running of Walmart’s ecommerce business. But even that plan is starting to run into heavy weather. Walmart’s legacy tech and its bureaucratic organisational systems, its lack of fulfilment centres, its attempt to mimic Amazon’s endless aisles have stretched its resources considerably.

So what does it now do? With growth slowing down in its home market, its bet on India—and Flipkart—is seen as a desperate attempt to sell a new narrative to the markets. The trouble is that Flipkart itself is caught in a bind. It has been consistently outpaced by Amazon’s execution machine for the last two years. It has failed to build stickiness, choosing to focus on deal-driven categories like smartphones and appliances. Its vendor base is often up in arms, pointing out incessant delays in payments and constant shuffling of the deck. The grocery business has been a non-starter. And its workplace culture and policies around ESOPs have created considerable bad blood within. And losses have simply grown, even as it has pushed for higher top-line.

Once it takes over, the key question is: Can Walmart fix things at Flipkart? Especially given its past track record in emerging markets. The fact that it doesn’t have a proven leadership cadre that understands technology — and the complexities that emerging markets throw up — will force it to depend on Flipkart’s current leadership team, most of whom are unlikely to have enough skin in the game, especially after the handsome payoffs. The chances are that Walmart may be left holding the baby after the initial honeymoon period is over.