Why Walmart bought Flipkart and does the deal make sense

Last Updated: Sat, May 12, 2018 11:05 hrs

The fact that we are the second most populous country in the world with a substantial young population who have money to spend and have an exploding e-commerce market, make India and Indian companies ripe for investment. This is what the world’s largest retail company Walmart, which purchased a majority stake (77%) in Indian e-commerce giant Flipkart for $16 billion, might have been thinking.

The deal was hailed by fellow e-com entrepreneurs.

This is Walmart's biggest deal yet. For Flipkart, it's a win too. It was already the third most funded private company in the world and the biggest player in the Indian e-commerce space. Currently it has over 30000 employees. The Times of India editorial stated that this deal was a good step which will boost Indian retail and the entire start-up space –

"Over the last couple of years, India witnessed early signs of convergence between offline and online retail. Retailing has evolved in the direction of an omni-channel business model. The implication is that e-commerce is not a zero sum game," the paper noted.

The paper also went on observe how the deal comes at a time "when online and offline retail are rapidly converging".

Only last year, Flipkart's Amazon NV Holdings LLC, the investment arm of the world's largest online retailer, purchased a 5% stake in Shoppers Stop. This will result in the two companies conducting joint marketing campaigns and Amazon Experience Centres at Shoppers Stop stores for Amazon to showcase its own brands.

"The Walmart deal has come in the wake of a global trend where online and offline retail are rapidly converging. Therefore, this deal is a positive development not just for the retail industry but also the entire Indian e-commerce industry."

It was in 2014, that the e-com industry exploded in India. As many low-cost cell phones flooded the market, millions started purchasing online. In the same year, Flipkart raised more than $1 billion. However, in the following two years, the company faltered and this allowed Amazon to eat into its market share. The company pushed out Sachin Bansal as CEO. Author Vivek Kaul, in a column for Forbes India, outlines some of the important points in Walmart’s thinking –

"Walmart is buying a company which loses money. Media reports suggest, in 2016-2017, the losses of Flipkart were Rs 8,771 crore. They rose by 68 percent in comparison to 2015-2016. On the other hand, the revenues rose by 29 percent to Rs 19,854 crore. Walmart is basically paying for access to India's huge retail market, which it hasn't been able to tap through the physical format, given the prevailing regulations."

"It is very important to let foreign money continue to keep coming into India's e-commerce businesses (as well as retail businesses, where the regulation is convoluted right now). The reason for this is simple: These are risky businesses and they cannot be financed through the savings of the small Indian savers."

Walmart hasn't been able to operate its own stores in the country because of the restrictions on multi-brand retail in place in India. Both the current and previous governments have been sketchy in terms of allowing foreign retailers such as Walmart and Carrefour to operate in India directly. They can enter into partnerships with local retailers like was seen in the failed alliance between Walmart and Bharti Enterprises that ended in 2013. Even now, restrictions have only been removed for single-brand retailers; allowing companies such as IKEA to open stores in India.

For the industry, two big players now dominate - Amazon and Walmart. The options to shop on different sites may still be there, but any consumer will want the most and best options in terms of choosing products. Amazon has committed to continuing investments in India as the prospects of growth with buyers and sellers is high. The war between the two companies could benefit consumers with competitive pricing.

However, there is opposite argument being made. With the large amount of money spent on acquiring a majority stake, perhaps Walmart could have spent this money on offline stores, which is its strength. K Vaitheeswaran, founder of India’s first ecommerce company Indiaplaza, in a column for the Hindustan Times, writes on why this deal is wrong –

"Over the past decade, Flipkart and other e-commerce start-ups raised billions of dollars, offered unsustainable discounts to acquire customers while brutally elbowing out other less-funded local competitors to become the undisputed leaders in gross merchandise value and financial losses," he notes.

Amazon is widely considered to be the best when it comes to online retail. Amazon Prime has been a big success. It has a strong brand presence and plenty of money to spend on new technology. This holds true for its India operations as well; though Flipkart is still the leader here.

"If I was advising Walmart, I would simply ignore e-commerce in India while exploring ways of partnering strong offline retailers in India and launch an aggressive omni-channel play. Walmart's strength is offline, that’s what they should use to win. Using online to beat Amazon is like wearing a raincoat to counter a tsunami," Vaitheeswaran wrote.

The result of the entry of Walmart is sure to shake up established Indian retailers. Kishore Biyani, CEO of Future Group welcomes the deal saying in part, "It is an interesting deal where a physical retailer is buying a digital retailer. Both the online and offline are coming together and there are many things to come. It is the beginning of a new dawn of retail," he said.