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Walmart’s India avatar: Can it take on Amazon?

  With the Walmart-Flipkart deal almost in its final phase, the stage is set for the two global behemoths Walmart and Amazon to fight it out in the Indian e-retail space. In this article, we explore the challenges Walmart is expected to face, and how it can tackle the unknown waters in India.  

Dr Suresh Srinivasan

Walmart is believed to be entering the Indian e-commerce space through acquiring a majority stake in Flipkart, the second largest e-commerce player in the country.
The Indian e-commerce industry, pegged at more than two`2 lakh crore, has been fast growing and the size is expected to cross `10 lakh crore by 2022. Today, four players dominate the industry — Amazon, Flipkart, Snapdeal and Paytm. While none of them are making profits, bleeding cash has been the industry norm.
Over the last year or so, the industry and its players have been visibly moving away from the ‘discount’ model to focus on ‘customer experience’ and last mile delivery capabilities, for which scale becomes critical. Consolidation, therefore, has become a key strategy, and the race to consolidate between the two largest players — Amazon and Flipkart — is heating up.
The global rivalry between Walmart, the largest retailer in the United States of America, and US e-commerce giant Amazon is quite well known across markets. While Walmart acquired Jet.com for close to US$3.3 billion in order to gain a foothold in the e-commerce business, Amazon acquired Whole Foods, the ‘brick and mortar’ retailer for US$13.4 billion. In effect, both the players have been attempting to strengthen themselves with an omni-channel capability. The endgame: Not to lose ground to the other as the customer’s shopping preference transforms.

Walmart-Flipkart deal
There is an interesting angle to the deal that is brewing with Flipkart. SoftBank invested close to $2.5 billion barely 9 months ago, and is now reportedly prepared to exit Flipkart through the sale of its shares to Walmart. SoftBank invested in Flipkart when the latter was valued at around $12 billion. Now, it is being reported that Walmart’s acquisition will result in Flipkart’s valuation turning out to far higher than the last year’s figures. This might have been the trigger that encouraged SoftBank to exit Flipkart.
More importantly, with SoftBank already staying invested in Paytm, the other leading e-commerce player in the country, controlling close to 32%, SoftBank will continue to maintain its presence in the attractive Indian e-commerce space. Nine months ago, SoftBank, the majority shareholder in Snapdeal, was vigorously trying to broker a deal that would merge Snapdeal with Flipkart, providing a stronger platform for the merged company to compete with Amazon. However, the proposal did not go through, as Snapdeal promoters were not in agreement. SoftBank immediately exited Snapdeal and invested in Flipkart, which they will now be selling to Walmart.
Close to 60% of Flipkart is owned by SoftBank, Tiger Global and Naspers. The rest is fragmented across a number of smaller investors, including China’s Tencent Holding, eBay, Microsoft, Accel India and Flipkart promoters Sachin and Binny Bansal.

Attractive market, expensive valuation and higher risk
As a proportion of Walmart’s total revenue, e-commerce is still miniscule, at around 3%. However, the proposed Flipkart deal is sensible from the perspective that it directly gives Walmart access to one of the largest and fastest growing markets in the world.
Flipkart has a dominant position in electronic product segments like mobile phones and fashion products, especially with Jabong and Myntra under its fold. On the fashion merchandise front, Flipkart already holds a dominant market share, and it is aggressively targeting to retain its leadership position. This is an area where Amazon is lagging.
Again, India being the fastest growing economy with a large population still underserved from an e-commerce point of view, Walmart’s India entry through Flipkart is a logical move to grow the e-commerce component. With both the number of Internet users and mobile handset penetration growing, more and more customers are accessing the Internet through mobile handsets. In such a scenario, India is poised to be an attractive market, especially in the following 10-year horizon.

Expensive valuation
Digesting the valuation, especially given the financials, is a challenge. This is where Walmart seems to be taking its time to wrap up the deal. Turns out, the financials of Flipkart is not at all exciting for Walmart.
On an annual basis, although Flipkart is clocking revenue of close to `20,000 crore, its recorded losses stand at around `9,000 crore. With accumulated losses standing close to `25,000 crore, the company has virtually burnt through a large part of the funding it has received from investors over the last 10 years. Despite such financials, the positioning of the company and the attractiveness of the Indian e-commerce market are the key drivers that are pushing the valuation to around $14 to $16 billion (over `1 lakh crore).

High risk
Assuming Walmart is reconciled to shelling out the money and gaining entry into the Indian market, the risk associated with the venture is quite significant. Compared to Amazon, Walmart is still unaware of the e-commerce business, as well as the nuances of the Indian market. A large part of its e-commerce revenue comes from the sale of its own merchandise through its website Walmart.com.
Hence, compared to Amazon India, which has a five-year learning streak in India, Walmart needs to ramp up its the learning curve, both in terms of understanding the e-commerce business as well as India’s specific trends and requirements. So Walmart will, in most likelihood, retain the top operating management of Flipkart for quite some time.
Over the next few years, the competition will most likely centre around grocery and ‘hyper local’ deliveries. The last mile logistics will take the centre stage, and fulfilling returns will become crucial. Both Amazon and Walmart have adequate bandwidth in this area, and each one will strive to gain stronger capabilities.
To seal the deal, there are still a few challenging issues that need to be overcome. Flipkart has far too many divergent strategic investors who can stall the deal. eBay, for instance, has its own agenda. A high valuation could possibly entice such fragmented shareholders to sell.

What Walmart entry entails
Overall, there isn’t any doubt that Walmart’s entry into the Indian market will do the industry good. First of all, two strong players with deep pockets and global expertise in retail and logistics will deepen the capabilities within the industry. The competitive rivalry is likely to be intense, eventually benefiting the customer.
The growth is more poised in Rural India, and hence, large-scale infrastructure and logistics investments will become essential. Core promoters with operating expertise will be more comfortable with putting in such investments, as compared to passive investors without the operating expertise.
Given Flipkart’s dominance in mobile handsets and fashion merchandise, Walmart will have to leverage its expertise in grocery retailing, where it controls close to 18% of the entire groceries sold in the United States. If it can, Walmart can well give Amazon a run for its money in India!