A WALMART SUNRISE
Walmart’s Flipkart buy signals the beginning of consolidation in the Indian e-commerce space, but turning around the business will be challenging in a highly competitive market
The Walmart-Flipkart deal may signal a new beginning in the Indian e-commerce sector, but it’s not without its challenges
IN 2007, A HYDERABAD-BASED software freelancer ordered the book Leaving Microsoft to Change the World after seeing a link posted by Flipkart founder Sachin Bansal on the former’s technology blog. For a fledgling e-commerce portal that positioned itself as a supplier of books, the challenge was to find the book first since the distributor said it was out of stock. Sachin, along with co-founder Binny Bansal, rummaged through warehouses and bookstores to finally trace a copy to Sapna Book House in Bengaluru. When they asked the Hyderabad techie if he still needed the book as its delivery was delayed, the person replied, “I have waited two years for the book. I can wait for two more days.” Those were the days when customers who placed orders online barely believed the product would arrive in time and in good shape. But Flipkart had a different philosophy. “We went to extremes to ensure customers got products on time. Every single order used to teach us so much,” Sachin had told india today in an earlier interview.
Cut to May 9, 2018. After months of negotiations, Flipkart, which the Bansals launched with a Rs 4 lakh investment, was bought by the $500 billion US retail giant Walmart for $16 billion (over Rs 1 lakh crore), pitting it directly against rival American firm Amazon in the race to conquer the e-commerce space in the world’s second most populous country. The deal, one of the biggest involving an Indian company and announced by visiting Walmart CEO Doug McMillon in Bengaluru, will see the US retailer holding 77 per cent in Flipkart. The FlipkartWalmart combine and Amazon control 80 per cent of India’s $38.5 billion (Rs 2.6 lakh crore) e-commerce market. For the Bansals, who had once declared their relatively modest ambition of hitting revenues of $100 million in five years, the acquisition by Walmart is a bonanza. Sachin, who is exiting Flipkart by selling his 5.5 per cent stake, will rake in $1 billion (Rs 6,700 crore) while Binny, who still holds 4.5 per cent, gets elevated to executive chairman and Group CEO of Flipkart.
The deal is also a validation, if one were needed, of the business risk taken by these two IIT-Delhi batchmates to find a “new way of shopping” in a country where internet usage was growing at a fast clip. True, Flipkart had its own share of troubles in its journey of over a decade, but the huge valuations that the online retailer now commands—close to $21 billion (Rs 1.4 lakh crore)—has perhaps made the journey worthwhile.
SPURT IN ONLINE SHOPPING
What explains Walmart’s interest in India? The Indian e-commerce market may still be pretty small compared to the $500 billion US market, but is expected to grow to $200 billion (Rs 13.4 lakh crore) by 2026, according to India Brand Equity Foundation, a research body under the Union commerce ministry. This growth will be triggered by increasing internet and smartphone penetration. India’s total internet user base is expected to rise from 373 million in 2016 to 829 million by 2021, or just under 60 per cent of the total population. Total online spending, including domestic and cross-border purchases, is expected to increase by 31 per cent year-on-year to Rs 8.76 lakh crore by end-2018. The Flipkart deal is Walmart’s second coming in India’s e-tail space, after it called off a joint venture with Bharti Enterprises in the wholesale cash-and-carry business in 2013. The US firm was then accused of attempting a backdoor entry into multi-brand retail, where foreign entities were barred. It then focused on wholesale cash-and-carry stores, and now operates 21 such stores and one fulfilment centre in India. Walmart now plans to scale up its sourcing of Indian merchandise and farm products to $7 billion (Rs 46,900 crore) over an unspecified period of time. “The deal brings back the focus to India, and highlights the potential of the Indian e-commerce market,” says VidhyaShankar Sathyamurthi, executive director, Grant Thornton India. “It also underlines the enormous tech talent available in India and will have a multiplier effect in the Indian start-up ecosystem.”
That India’s largest e-commerce firm is going into foreign hands may be a bit discomfiting for the proponents of swadeshi. But this was inevitable, and probably the only way Flipkart could have stood up to competition from Amazon. In over four years, Amazon India, which offers over 160 million products on its platform, has turned into a formidable e-tail player, garnering a 44 per cent customer share and a growth rate 50 per cent higher than the competition.
Flipkart, too, made inroads like no other Indian e-commerce firm had. With 100 million registered users and over 8 million monthly shipments, it has been the darling of investors, attracting investments from SoftBank Vision Fund, eBay, Microsoft and Tencent, to name a few. This resulted in over $4 billion (Rs 26,800 crore) of cash on its balance sheet as on August 2017. Flipkart recorded a gross merchandise value of $7.5 billion (Rs 50,250 crore) in 2017-18, meaning goods worth that value were traded on its site between thousands of sellers and millions of buyers.
A FILLIP TO E-COMMERCE
The sale of Flipkart signifies a coming of age for Indian e-commerce. There were many naysayers when e-commerce took its baby steps in India, for the second time in the mid-2000s. This was after its initial tryst a decade ago left a trail of failed enterprises, investors losing money and tens of thousands losing jobs. The second coming has been better—Flipkart, Snapdeal, Myntra, fintech companies such as PayTM, and edutech firms such as Byju’s have been successful in garnering business and attracting global investors. These businesses commanded mindshare among consumers, but have yet to turn profitable. Flipkart’s success may start another wave of start-up entrepreneurship in India. Flipkart’s founders have already been investing in start-ups that include electric scooter-maker Ather Energy, AI-driven health tech firm SigTuple and biotech firm Pandorum. Experts say with the retail e-com market reaching saturation, other avenues such as healthcare and education would be on investors’ radars.
Domestic brokerage Edelweiss Securities lists three implications of the Flipkart-Walmart deal for Indian retail. First, online and offline partnerships
are likely to get a fillip. Second, online discounting may not increase as Walmart may drive private labels rather than focus only on gross merchandise value. Third, FMCG companies are likely to benefit as Walmart has expertise in hypermarkets/ grocery retailing and plans to tie up with neighbourhood retailers. Also, subject to regulations, Walmart’s cashand-carry business may be integrated with Flipkart at some point.
Flipkart has been a dominant player in online fashion, after it acquired Myntra and Jabong. The company also has a private label in the apparel space. With Walmart’s expertise in hypermarkets and grocery retail, Flipkart should be able to make deep inroads in the business, which will hurt the likes of BigBasket. “The key for the combined entity will be their ability to scale up, considering that current regulations permit only 49 per cent FDI in grocery physical retailing,” says Abneesh Roy, senior vice president at Edelweiss. Walmart is strong in physical retailing but weak in online commerce, which comprises just 3 per cent of its global sales. Its India business has been sub-scale, with annual revenues of $500 million (Rs 3,385 crore). With its huge cus-
tomer base and shipments, Flipkart clearly allows Walmart a scale that it cannot easily build on its own.
Walmart and Amazon are likely to have a bruising battle in the food and grocery segment. India’s retail segment was pegged at $710 billion in 2016-17, of which food and grocery accounted for 67 per cent. However, this segment is also very fragmented, and organised retail has only 3 per cent market share. Last year, Amazon received government approval to start a venture to sell locally produced and packaged food items offline and online. Amazon India Retail, a fully-owned Amazon subsidiary, is piloting this in Pune. Walmart is expected to invest heavily in creating infrastructure like food parks, cold chains and collection centres. Food is already an important part of Walmart’s cash-andcarry business in India, comprising around 60-65 per cent of annual sales.
DEATH OF DISCOUNTS?
Critics of the e-commerce model in India have often said the deep discounts offered by the likes of Flipkart are unsustainable and the reason why they haven’t made profits despite being in the business for a decade. For the year to March 2017, Flipkart posted losses of Rs 8,770 crore on revenues that had grown 30 per cent. This was primarily on account of a five-fold increase in finance costs to Rs 4,308 crore, said reports, driven by a fall in valuation. The valuation fell from $15.2 billion in 2015 to $11.6 billion in April 2017 when the business model looked shaky and new entrant Amazon began to give stiff competition. How will Walmart ensure a turnaround? “Discounts, which initially helped acquire customers, are going to stop,” says Sathyamurthi. Walmart will also leverage its supply chain efficiencies. “When you have a strong supply chain, you have better control over pricing and delivery,” he adds.
Experts say Amazon captured the mindshare of consumers with its customer-centric approach and price sensitivity, such as offering daily ‘best prices’. The success of WalmartFlipkart would depend on whether it is able to establish a world-class supply chain in India. According to Supply Chain Digest, Walmart stocks products made in more than 70 countries and, at any given time, operates more than 11,000 stores in 27 countries, managing an average $32 billion in inventory. Estimates say 95 per cent Americans
shop at Walmart at least once a year. As early as the 1980s, Walmart had begun working directly with manufacturers to cut costs and manage the supply chain more efficiently. Vendor Managed Inventory, its supply chain initiative, decades ago made manufacturers responsible for managing their products at the retail giant’s warehouses, resulting in nearly 100 per cent order fulfilment. “Walmart seems to have ceded ground to Amazon in the US, and may look to reverse the trend in developing countries—its investee JD.com in China has made progress against Alibaba, and Walmart may attempt to do the same against Amazon in India,” says Kotak Institutional Equities in a research note.
POLICY HICCUPS
Indian laws require e-commerce sites to sell wares from third parties and are not allowed to have their own inventory. Moreover, 100 per cent FDI is allowed only in such online ‘marketplaces’, with riders that restrict a seller from contributing more than 25 per cent of overall sales generated on any e-commerce site. Some say these measures have stymied the potential of Indian entrepreneurship and facilitated big takeovers by foreign entities. “Although reasonably clear in intent, India’s e-commerce policy lacks comprehensiveness, inter-departmental coordination and enforcement muscle,” according to Sanjay Sethi of ShopClues.com. Global tech giants, including Google, Facebook, Amazon, Airbnb, Uber, Alibaba and Walmart, dominate India’s e-commerce and internet industry. “More worrisome is that through clever corporate structuring, these global giants have, using domestic operators, circumvented the spirit of the law while possibly adhering to it in letter,” he says.
India is expected to come out with a framework for an e-commerce policy towards the year-end to deal with issues such as competition, regulation, data privacy, taxation, technical aspects like localisation of servers, and technology transfer. Local traders have opposed the Flipkart-Walmart deal, arguing the discounts offered by online supermarkets will imperil their livelihoods. The Confederation of All India Traders, which represents millions of traders, has claimed Walmart-Flipkart will encourage predatory pricing and demanded government scrutiny of the deal.
Is the Flipkart-Walmart deal the beginning of consolidation in Indian e-commerce? Possibly. India is too big a market for MNCs to ignore, especially those restricted by the norms of multi-brand retail. Walmart’s acquisition of Flipkart will effectively consolidate the Indian e-tail sector into a two-player market. The ensuing balance sheet strength will drive investments in infrastructure and promote efficiencies that will ultimately benefit the Indian consumer, though foreign strategic players will end up dominating Indian e-commerce verticals. Call it the flip side.