Walmart’s Flipkart deal: good move or bad?

The news that Walmart is to pay US$16 billion for a 77 percent stake in Indian e-commerce venture Flipkart, has been met with enthusiasm in some quarters and skepticism in others.
15 May 2018 | 1896 Shares

Not everyone is happy with the decision. Source: AFP

Let’s start with the enthusiasts. This is the US retailer’s largest-ever acquisition, outstripping the US$10.8 billion it paid for Asda in 1999.

“India is one of the most attractive retail markets in the world, given its size and growth rate, and our investment is an opportunity to partner with the company that is leading the transformation of e-commerce in the market,” says Doug McMillon, Walmart’s President and CEO.

E-commerce is still a relatively small part of retail in India, but it has massive potential. According to GlobalData, the market was valued at US$10,488.5 million in 2017 and is forecast to reach US$35,460.4 million by 2021 at a CAGR of 35.6 percent.

Amazon has been busy cloning itself in the country.

Meanwhile, despite entering India back in 2007, Walmart operates just 21 Best Price cash-and-carry stores and one fulfillment center in 19 cities across nine states. Restrictive government policies have hindered the retailer’s expansion plans. It needed to respond to an aggressive Amazon and, in that context, the acquisition route makes sense.

“Amazon already has a substantial foothold in India at 27 percent market share, and Walmart knew they needed to get into that market prior to Amazon either acquiring Flipkart or taking market share away,” says Dan Neiweem, Co-Founder and Principal, Avionos.

“Via this deal, Walmart has become the leader in e-commerce in India. Amazon has committed $5.5 billion to India, so it was only a matter of time before they took over as the leader. If Walmart didn’t make this move now, they would be likely spend way more to get into the market.”

From a synergy point of view, Walmart can leverage Flipkart’s market base and its online distribution channel, while Flipkart can tap Walmart’s scale, strategic support, supply chain and retail prowess, observes Suresh Sankara, Retail Market Analyst at GlobalData.

This will also help in the fight against Amazon Pantry and Big Basket, which received significant capital infusion from Alibaba in February.

Moving on to the skeptics, who would point out that Walmart doesn’t have the best of track records operating outside North America.

It recently, for instance, announced plans to pull out of the UK and sell Asda to Sainsbury’s. In the US, Walmart has been ramping up its omnichannel strategy, but it still relies a lot on its physical retail presence. Merging this experience with a pureplay like Flipkart will be challenging.

The deal has also spooked investors, with Walmart shares falling as much as 4 percent after it was announced, losing nearly US$10 billion in market cap.

“As Flipkart is expected to generate meaningful losses for at least the next few years, this is clearly an investment for the future,” Moody’s analyst Charlie O’Shea wrote in a note.

Walmart might take Flipkart public in as early as four years, it disclosed in a US SEC filing on Saturday. In the meantime, it will be interesting to see if Amazon now reworks its strategy for India. Earlier this month, it made a formal offer to buy 60 percent of Flipkart.

That, of course, didn’t work out, but, this being Amazon we’re talking about, we could well see further acquisition attempts in the near future.