Retail therapy

Walmart's Flipkart buy could be a high-risk strategy

After over a decade of trying, the world’s largest retailer has finally gained a toe-hold in the Indian retail market for $16 billion. Viewed from Walmart’s global revenues of $500 billion, this appears to be a small price to pay for a 55 per cent market share in a fast-growing online retail market — more so when rival Amazon has had a six-year head start, and now accounts for the remaining market share. True, this purchase gives Walmart a running start, and it has the deep pockets to compete against an equally cash-rich rival where Flipkart was running out of cash. The questions centre on Walmart’s real gains from the deal, both in terms of Flipkart’s valuation and the nature of the market the Bentonville, Arkansas-headquartered company is entering.  The deal has met with scepticism on Wall Street. Walmart’s investors reacted negatively, wiping away $10 billion worth of the company’s market capitalisation in early morning trade on the New York Stock Exchange, and S&P revised its rating from “stable” to “negative”.

An investment of $16 billion for a 77 per cent stake values Flipkart at $21 billion against $10.5 billion a year ago. This sharp valuation jump within a year is the opportunity cost to enter the Indian retail market and challenge Amazon’s global monopoly. This entry strategy needs to be set against the realities of Indian retail, however. The domestic online retail market is valued at about $19 billion, a tiny fraction of the total Indian retail market. Drilled down to Flipkart’s market share, Walmart would be paying, in effect, a significant premium to acquire a share of about 3 per cent in Indian retail, which is not yet within the top 10 in global rankings.

Walmart’s challenges may also flow from a legacy issue: Despite its five-year first-mover advantage over Amazon, Flipkart has not been able to make profits in its 11 years under the Bansals. Walmart, which is itself making sizeable losses, is yet to specify the deadline it has set to make money in India or what additional investment it will put in to do so. It is possible that the bottom line will not be a major concern as it seeks to establish its dominance. But the fact is that the dynamics of retailing are changing, with growing convergence between online and brick-and-mortar structures (Amazon’s backward integration in the US is a good example of the new dynamics). Achieving this seamless structure by acquiring a brick and mortar B2C chain in India has long eluded it (it has only B2B cash and carry outlets in the country and exited a joint venture with the Bharti group). In this, Walmart and others were a victim of strange government policy that distinguishes between single- and multi-brand retail, allowing only a 51 per cent joint venture route for foreign investors in the latter and restricting it with challenging conditions.

Indeed, the fact that this deal will extinguish significant domestic players from online B2C retail is a pointer to some challenges of doing business in India. E-commerce has been the focus of much capricious policy in recent years; when combined with the myriad practical difficulties of setting up and running a business in India, it is fair to say that domestic e-commerce entrepreneurs have been ill-served. Indian online consumers will certainly enjoy the fruits of a global duopoly in terms of fierce discounting wars for a while and the deal demonstrates that Indian startups can start from scratch, take billions of dollars in investments, and give massive exits. But the exit of the Bansals also exemplifies like nothing else that the larger cause of emerging Indian entrepreneurship remains a losing proposition.