Wal­mart’s Big Bet

Business Today - - CONTENTS -

THE US-based re­tail gi­ant Wal­mart is pay­ing $16 bil­lion to take a 77 per cent stake in In­dian on­line re­tailer Flip­kart. Mean­while, Ama­zon In­dia is also mov­ing fast, and its par­ent Ama­zon Inc has made it very clear that it will con­tinue to in­vest in In­dia to be­come a mar­ket leader. At the mo­ment, Flip­kart is ahead of Ama­zon In­dia in terms of to­tal sales, and both on­line re­tail­ers are los­ing money heav­ily. Last year, Flip­kart lost over a bil­lion dol­lars and Ama­zon, at least, around half a bil­lion.

The Wal­mart in­vest­ment into Flip­kart is bound to af­fect phys­i­cal re­tail­ers in In­dia – from or­gan­ised re­tail­ers like Reliance Re­tail, Kishore Biyani’s Fu­ture Re­tail and also mom-and-pop gro­cery and veg­etable stores. Sev­eral right-wing and left-wing or­gan­i­sa­tions have al­ready protested the Wal­mart in­vest­ment, say­ing it is get­ting an en­try through the back­door (since multi­brand phys­i­cal re­tail by global com­pa­nies is not al­lowed in In­dia, ex­cept in the cash-and-carry seg­ment and only a mar­ket­place model is al­lowed on­line). They want the gov­ern­ment to block the deal even while the tax depart­ment is hop­ing for a sig­nif­i­cant gain be­cause of cap­i­tal gains levied on the trans­ac­tion.

Also, there are some mis­con­cep­tions about the deal. One is that an In­dian firm is sell­ing out to a for­eigner, thus leav­ing the on­line re­tail mar­ket to be carved up be­tween two US-based com­pa­nies. This is a bit of a stretch be­cause while Flip­kart was started by two In­dian en­trepreneurs – Sachin and Binny Bansal – and its only area of op­er­a­tions is within the coun­try, it had ceased to be an In­dian-owned en­tity long ago. Most of the Flip­kart fam­ily en­ti­ties are reg­is­tered in Sin­ga­pore for mul­ti­ple rea­sons (mostly to get around In­dian pol­icy re­stric­tions), and the ma­jor­ity of the shares were owned by global ven­ture cap­i­tal­ists, in­clud­ing Tiger Global, SoftBank, Naspers, and Ten­cent.

What will be the im­pli­ca­tions of the Wal­mart-Flip­kart deal on the In­dian re­tail mar­ket? Our cover story will give you the de­tailed view, but here is my pot­ted anal­y­sis. One, you can ex­pect Wal­mart to pump in more cash into Flip­kart and Ama­zon Inc into Ama­zon In­dia as both fight for dom­i­nance. Both will give enor­mous dis­counts and that will trig­ger off a dis­count war.

Among the phys­i­cal re­tail­ers, Reliance Re­tail has deep pock­ets and it will con­tinue with­out a pause. It is also true that Reliance Re­tail and the oth­ers have made vain ef­forts at crack­ing the on­line re­tail mar­ket. Fu­ture Group’s Biyani will be in a spot as he lacks the deep pock­ets of his ri­vals. But he is fo­cussing on FMCG now and re­duc­ing his em­pha­sis on re­tail.

If the gov­ern­ment strictly im­ple­ments its rule of on­line mar­ket­places as op­posed to in­ven­tory plays, I would ex­pect the over­all Wal­mart and Ama­zon in­vest­ments to help smaller In­dian traders and busi­nesses.

And fi­nally, I stick my neck out and say that Wal­mart over­paid for Flip­kart and the buy is un­likely to help it be­come an on­line power. De­spite mul­ti­ple ef­forts, in­clud­ing ac­qui­si­tion of Jet.com, Wal­mart has not mas­ter­ered on­line re­tail. I sus­pect it will con­tinue to lose money heav­ily on Flip­kart and even have to write-off a big chunk of its in­vest­ment at some point.


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