Walmart’s Big Bet
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.