When Carl Douglas McMillon, president and chief executive officer of Walmart Inc, arrives at the Embassy Tech Village headquarters of Flipkart in Bengaluru later on Wednesday to acquire India’s first-to-a-billion-dollars-startup, he will be accompanied by Walmart International’s Judith McKenna and CEO (commerce) Marc Lore. It will be a triumphal return to India for the Bentonville, Arkansas-based retailer which will be partnering Google’s parent Alphabet Inc in a deal estimated at $18-20 billion enterprise value – Walmart will own about 60 per cent stake, and Alphabet will get to own about 15 per cent of the online market place.
The passage of the past five years has obviously dulled memories. All recent media reports seem to have conveniently glossed over the history of Walmart’s previous foray into India, in partnership with Sunil Mittal’s Bharti group. Walmart in 2012 launched a global review of corruption after a New York Times report on bribery at the company’s Mexico operations. The review by its lawyers flagged India among the countries with the highest corruption risk. The US Foreign Corrupt Practices Act forbids American firms from paying bribes. Almost on cue, in November that year, Bharti Walmart suspended a number of employees, including the chief financial officer, as part of an internal investigation into bribery allegations in the Indian operation. By June 2013, Raj Jain, the CEO of the India operations, quit after six years at the helm of the company. It did not take much time thereafter for the Walmart-Bharti JV to fall apart.
CEO Carl Douglas McMillon’s meeting with Walmart India employees is expected on ThursdayOne hopes that this time around Walmart has done enough due diligence before committing to the deal. One hopes that someone has told Carl Douglas McMillon (Doug to friends) that when Flipkart-owned Myntra acquired fashion e-tailer Jabong from the troubled Rocket Internet, Jabong was facing a huge number of corporate governance issues. Hope Doug has made sure that there are no troublesome skeletons from the past that might come in the way of US laws that Walmart likes to be governed and guided by, because of Jabong’s past.
Also, Doug must surely have been apprised that earlier this year Flipkart lost an appeal against the income-tax department over the reclassification of marketing expenditure and discounts as capital expenditure, which would surely have involved substantial tax liabilities from the past. Just for Doug to know that this ruling was made in December last year, and the issue involved money spent by ecommerce companies on marketing through deep discounts. Flipkart (and Amazon too) have been classifying these discounts as marketing expenses and deducting them from revenue, leading to them posting losses and therefore not being liable to tax. The tax department, however, contended that this was not a cost but a capital expenditure, which meant that it should not have been deducted from the revenue.
Thankfully for Doug and for Walmart, last month the ITAT’s bench of NY Vasudevan and Jason P. Boaz, decreed in favour of Flipkart, saving it from a tax liability of Rs. 110 crore. This issue of deep discounts however may still need detailed briefing to Doug as the Confederation of All India Traders (CAIT), an umbrella association representing millions of India’s small traders, too has been demanding government scrutiny of Flipkart’s predatory pricing through deep discounts. So, Doug does need to know that while he is taking ownership of India’s largest e-tailer, there are issues from the past that may need for the euphoria to be tempered somewhat.
The most important question on Indian minds for Carl Douglas McMillon is whether Walmart will retain the Flipkart name going forward? On this, obviously, Walmart’s position so far is that the Flipkart name will be retained. This may of course be true in the immediate short run, but the overwhelming feeling among young Indians is that the brand name Walmart is a far better choice than Flipkart to fight Amazon. In a straw poll done over the past 24 hours on the mobile phone, this is what 187 men and women, aged 18-30 years had to say:
1. Walmart is a stronger brand name than Flipkart (72%)
2. Walmart is a stronger brand name because it is global (69%)
3. Walmart will be able to fight Amazon better than Flipkart (63%)
4. Walmart brand name will give me higher quality assurance (70%)
At another level, Flipkart in its new avatar under Walmart has a lot of customer expectations.
1. Walmart will offer more global products in India (42%)
2. Walmart will be more efficient than Flipkart (59%)
3. Walmart prices will be better than Flipkart (57%).
4. Walmart will offer better customer care (82%).
Flipkart has come a long way since Sachin Bansal and Binny Bansal first met in 2005 at the Indian Institute of Technology, Delhi, and then came together to set up the company in 2007. The first ever order Flipkart executed was a book, John Wood's Leaving Microsoft to Change the World. More books, music, movies, games, electronics and mobiles followed. Also, operations expanded beyond Bengaluru. Flipkart today sells 8 million products across 80-plus categories. It has 100 million registered users, 100,000 sellers, 21 warehouses, 10 million daily page visits. With the Walmart acquisition today, it will also shed its ‘start-up’ tag forever, becoming part of a global behemoth.
What will be interesting is to see how the world’s largest brick-and-mortar retailer Walmart adjusts in India to an e-tail business. Back home in the US, Walmart has been playing the online-offline strategy to full advantage. For example, it raised prices for certain items online, mostly groceries, in an effort to improve profitability and draw more customers into its stores, where it was hoped they would potentially do more shopping than they would online. This is an advantage Walmart will not enjoy in India.
Now, with Walmart eyeball-to-eyeball with Amazon, the biggest advantage for Amazon could be its extremely loyal Prime customers. This has also been adequately demonstrated in the US, where Walmart tried a two-day doorstep delivery with free shipping offer above $35 but failed to move Amazon Prime customers. There are 90 million Prime households in the US. The number in India may be much, much smaller, but Amazon surely has a head start in this important customer loyalty and retention tool.
For India as a country, the falling of Flipkart into foreign hands is a serious setback to Prime Minister Narendra Modi’s ‘Make in India’ dreams. The entire e-commerce battle is now America versus America. While Walmart is moving from offline to online with a vengeance (it bought Jet.com last year), Amazon has moved from online to offline with its Whole Foods acquisition.
Knowing how Big Business globally manages to move laws and regulations, the day might not be far when these biggies together find ways of taking their current e-tail rivalry in India to the brick-and-mortar space, too, wiping out the entire mom-and-pop retailing that so signifies the Indian marketplace.
So far, the Indian government has kept its peace on the Indian e-commerce space getting completely denuded of Indian ownership, but this is surely an issue that should be bothering Mr Modi’s think-tanks. More than that, how these American biggies will deal with small merchant partners should be a cause for immediate concern.
Just for the record, according to India Brand Equity Foundation, a government-supported research agency, the Indian e-commerce market is expected to reach $64 billion by 2020 and $200 billion by 2026 from $38.5 billion as of 2017. This is, therefore, serious business – actually, very, very serious business. Business, the government cannot afford to ignore and refuse to oversee, if not regulate.
The sale of Flipkart is not just the sale of one company. It is the beginning of a new tomorrow. It is just that one cannot be sure whether that tomorrow will be better for India than today. One can just hope for the best.
Sandeep Goyal is a marketing and advertising veteran with over 30 years in the business. He is Chairman, Mogae Media.