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Flipkart-Walmart deal: What the future holds

  The Indian e-commerce has been given a major shaking up after the Walmart-Flipkart deal. What does this entail for the various competitors, including the biggest rival Amazon, and other groups eyeing their share of the pie, like Alibaba? And ultimately, how will the customer benefit, if they do at all?  

Dr Suresh Srinivasan

Walmart has signed and concluded the deal acquiring 77% of Flipkart spending US$16 billion. This transaction values Flipkart at around $20 billion. The Indian e-commerce industry continues to prosper; growing exponentially at more than 20% on a compounded annual growth rate (CAGR), and is likely to reach $70 billion by the year 2020. This translates to nearly `5 lakh crore.
Homegrown players Flipkart, Snapdeal, Paytm and various other local players have been struggling to keep pace with this growth and keep needing more cash infusion for sustenance; it is still a discounting game, after all. The global giants are tightening their belts; be it Amazon, Walmart or Alibaba — they are descending into the Indian market in full force, and their timing, for that matter, is quite perfect!

Flipkart’s future
Flipkart is certainly a proud Indian startup that has achieved its fair share of glory and is currently valued at $20 billion, and the Bansals will always remain a great role model for the Indian startup community. Flipkart is the largest funded Indian startup, and its growth has been astonishing, although the valuations have been volatile, in line with industry sentiments. The company was valued, at its peak, at around $15 billion in 2015, but dropped steeply to around $12 billion in 2016 and further to less than $10 billion in 2017. However, in spite of its seesaw valuation, it has been steadily building capabilities; acquiring eBay is an example.
Such a steady drop in valuation over the last three years is proof of the investor’s perception of the industry losing its attractiveness. However, the current deal that places a value of around $20 billion on Flipkart is way ahead of what the market perceived, and brings a lot of optimism to the industry as a whole, and more specifically to Flipkart as an entity. Assuming that Walmart has prudently valued Flipkart, such a high valuation and the transaction demonstrates the unlocked value both within the industry as well as within Flipkart.

Competitors, including the biggest, Amazon, and other smaller players
The Walmart effect will have different kinds of impact on the competitors. For example, Snapdeal’s case will be interesting!  Over the last 12 months or so, Snapdeal has been seen to be looking at a long term philosophy. Sharply moving away from the ‘top line’ and the discounting race, Snapdeal has shrunk its business and size (including staff reductions), and is focusing more on creating a loyal customer group through providing a superior platform experience. In effect, Snapdeal may not grow that aggressively, but can carve a clientele for itself. This means that in the future, with aggressive players like Amazon and Flipkart growing steeply, Snapdeal may turn out to be a good acquisition target.
As far as the Paytm story is concerned, the impact of the Flipkart-Walmart deal on Paytm is likely to be different. It is an aggressive player with a strong backing from Chinese investors, especially the Alibaba Group, which has aspirations of making it big in the Indian market. In fact, Alibaba is aspiring to emulate its Chinese e-commerce success in the Indian market context, but is unfortunately stuck with the ‘China’ perception, i.e., something which the customers may not value to a great deal. Hence, Alibaba has soft pedaled the issue and is using the Paytm umbrella to make it big in the Indian e-commerce market.
At the end of the day, the essence of its strategy will be to beat Amazon and Walmart in the Indian market; it will be prudent to mention here that after all, Alibaba is the largest e-commerce company in the world!
Today, Paytm is valued at close to $10 billion. The group also has received a payments bank licence from the Reserve Bank of India. Alibaba, along with Ant Financial (formerly known as Alipay) holds close to 40% of Paytm. Alibaba aggressively expanding across the e-commerce space, including the entertainment arena, and is talking positions in companies like Bookmyshow, Insider.in and TicketNew. It is aiming to sell 100 million tickets across the country during the current year. These are a few examples of how Paytm, and therefore Alibaba, is leaving no stone unturned to achieve scale.

How will the e-commerce market react?
Walmart’s entry into the Indian market through the Flipkart route is great news for the e-commerce industry. The industry was sliding into a bit of cash deficiency, with too much of private equity investor cash being burnt up. More funding at attractive valuations were not flowing in. The valuations of the Indian e-commerce companies were dropping quite steeply with every round of private equity infusion.
Now, with a strong player like Walmart taking the lead to come in at a very high valuation, the signalling effect to the e-commerce industry can be quite powerful, encouraging more players to stay invested and for fresh investments to flow in at higher valuations.
The other big boost for the e-commerce industry comes from an infrastructure perspective. With a company like Walmart coming into the fray, its spends to improve logistics can be significant. Currently, Amazon has embarked at around $5 billion, and has been spending large sums to create the logistics and last mile delivery effectively. Such investments have cascading effects and ‘common-use’ infrastructure are created, as a sort of ‘spillover’ effect, which smaller e-commerce companies can also use.
This also gives a lot of encouragement for smaller e-commerce companies in different areas that are sprouting and growing, such as niche players like events booking e-commerce companies, used car sales, online travel aggregators, home rental sites, etc.

How the consumer will benefit (or not) from this deal
Indian e-commerce players are, by law, allowed to operate only as marketplaces. What this means, in effect, is that such companies should be in the business of connecting the buyers and sellers through their platform and should have a wide range of sellers on their platform without relying on only a few sellers, which is the current practice. More than selling their own products (by holding inventory), these market makers need to promote a good mix of third party products on their sites. Such a regulation will also move the industry away from the ‘deep’ discounting practice and towards offering quality products to customers at affordable prices, giving them a pleasant buying experience. Hence, on balance, the deal is good news to the e-commerce industry as a whole.
The Walmart deal is a loud and clear sign that ‘discounting’ as a philosophy is not going to work anymore in the Indian e-commerce context, and customer loyalty cannot be bought by merely offering discounts. Last mile connectivity, a liberal ‘return of goods’ policy and providing a quality user experience will be the name of the game. The deal brings in a financially strong ‘strategic’ shareholder like Walmart into the Indian e-commerce industry, and with Amazon also moving along the same lines, the customer is bound to benefit.