Flipkart-Walmart deal: Union of e-commerce giants unlikely to deter Bezos

As early as July 2015, Jeff Bezos, CEO of Amazon, had said that he would even sink $40 billion into winning in India

On July 23, 2015, US online retail giant Amazon reported a surprise profit of $92 million for its second quarter, leading to a frenzy among investors to snap up shares of the Seattle-headquartered company in after-hours trading. The surge added almost $40 billion to Amazon’s market capitalisation, allowing it to whizz past its biggest rival, Walmart, for the first time.

While this called for celebrations at Amazon, Jeff Bezos, founder and CEO of the company, had something else on his mind. He told employees that even if Amazon had to spend every last dollar of the market cap it gained that evening to win in India, it would. “If we lose India, we lose the world,” Bezos said, according to a person who was privy to this discussion. 

This was also around the time that Bezos began to see his bet in China failing. In early 2015, after the company spent years trying to localise its offerings to win in the country, it began selling its wares through a storefront on rival Alibaba’s platform. Industry watchers saw this as the beginning of the end for Amazon in China, making it all the more imperative for Bezos to win India.

In the five years since Amazon’s launch here, the company has to some extent lived up to that dream. While Flipkart still holds the distinction of being the largest e-tailer in terms of gross merchandise value (GMV), Amazon has steadily closed the gap with the Indian company, even outdoing it on several fronts such as sales volume and by launching its Prime loyalty service.

However, with Walmart now acquiring a 75 per cent stake in Flipkart for close to $15 billion, Amazon will face its biggest hurdle in its run to dominate India’s fast-growing e-commerce market. It is clear that the Bentonville, Arkansas-based retail giant is also willing to divert billions of dollars it earns in the US and other markets in its effort to gain a foothold in India, the last large open market in the world.

Despite this flurry, it is unlikely that Amazon is going to hold back from investing more and growing its business in India. Bezos has already committed to investing $5.5 billion to win in the country and Amit Agarwal, head of Amazon India, has said this figure is just a placeholder until the company sees the need to invest more. In 2017-18 alone, Amazon invested Rs 81.5 billion (approximately $1.3 billion) in its Indian e-commerce unit and the company has displayed its continuing aggression by pumping in Rs 26 billion (approximately $390 million) in late April. 

Amazon even made an attempt to pick up a majority stake in Flipkart with an investment proposal that would have involved sinking as much as $12 billion in the Indian firm. This might have helped end the long and costly battle the US online retail giant has waged in India over the past five years. However with Walmart beating it to the draw, Amazon will just fall back on its original plan of outspending and outmaneuvering its rivals.

To put Bezos’ eagerness to win in India in perspective, on the fateful day three years ago when he made the pitch to employees that Amazon needed to dominate India at any cost, the company’s market cap hit $265 billion while Walmart’s market cap stood at around $233.5 billion. Today, the scales are tipped awfully in Amazon’s favour with its market cap hovering close to $780 billion, while Walmart lingers at $250 billion.

Investors are willing to place such a huge premium on Amazon because of its pace of growth. Walmart’s revenues in the year that ended on January 31, 2018, (Walmart follows a February to January financial year) were $500 billion, growing at around 3 per cent when compared to the previous reporting period. Amazon reported revenues of $178 billion for its financial year that ended on December 31. Despite this number being far smaller than that of Walmart, Amazon posted growth of 31 per cent over the previous year.

Walmart, still much larger, is growing far slower than Amazon. Moreover, the company has been late to the e-commerce game, with sales from its US e-commerce arm recahing just $11.5 billion in the previous financial year, compared to $106 billion in sales Amazon generated in the US in 2017. A large portion of the premium that investors are willing to give Amazon comes from its prowess in online retail, which is touted to be the future of shopping, while investors are still keen to see how its other bets, such as offline stores with no human workers, play out.