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

India Today - - INSIDE - By M.G. Arun

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.

CHAN­DAN KHANNA/AFP

A SEA­SON OF PROTEST Mem­bers of Aam Aadmi Party’s trade wing protest against the Wal­mart-Flip­kart deal in New Delhi

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