With Walmart seemingly set to acquire a stake in Indian unicorn Flipkart, YourStory takes a look at why it makes sense for the two biggies to seal the deal.
It was supposed to be an East vs West clash between Alibaba and Amazon on Indian soil. Seems like Walmart did not get that memo. For the US retail giant is all set to acquire a significant stake in Flipkart, which will result in a direct clash with its old rival Amazon in India, the only big ecommerce market that is still up for grabs.
A so-called counter-offer from Amazon notwithstanding, the Walmart deal is what will go through if a few issues like valuation for secondary stock sale are ironed out. The deal on offer, according to sources, will value Flipkart, pre-money, at $18 billion—a dramatic shift in fortunes for a company that in 2016 was faced with repeated valuation markdowns from its investors.
There was speculation that Flipkart might carve out the fashion arm—Myntra and Jabong—and give Walmart stake only in the core marketplace, but that does not seem to be the case now. “Fashion is the most valuable segment of Flipkart Group right now. Why would Walmart not want that?” said a person aware of the details of the discussions. The plan for Walmart is to ensure a path to majority ownership of the 10-year-old ecommerce marketplace. The due diligence is done, according to reports, and many of the early investors of Flipkart are on board (many of the early investors will partly or fully exit). The valuation of some of Softbank’s stake for the secondary sale is still to be finalised, according to the source.
But the deal and deal contours are not the story here; for that we will wait for the deal to get finalised. The story here is on why this deal is happening and why it makes great sense for both Walmart and Flipkart, beyond the fact that the names rhyme!
“In the US, Walmart is the only formidable competitor left for Amazon. Walmart has been growing its ecommerce operations a lot and Amazon has been increasing its footprint with physical stores. It’s natural for that battle to spill into international turf as well,” says Kartik Hosanagar, Professor at The Wharton School of the University of Pennsylvania.
Despite the potential for growth in online retail within US, Amazon has already made big strides in international markets. This is because the expectation is that emerging markets of today will become growth drivers of the future. China’s Alibaba, for instance, is valued at over $520 billion, and most US tech and ecommerce companies either missed the China bus or were kicked out.
India is the only big ecommerce market still up for grabs. India’s online retail market grew at 23 percent in 2017. While India’s overall retail market is over $670 billion in size, online sales is just at $20 billion. The headroom for growth is immense, with 60 percent growth expected this year.
Amazon is already in a strong position in India with a market share of around 35 percent, compared to Flipkart Group’s 45 percent. If Amazon extends this lead in India or builds an unassailable position, the company will be able to extend its overall lead over Walmart dramatically.
Satish Meena, Forecast Analyst at Forrester Research, says Walmart now realises that an offline-only play might not happen in India. “They have been trying to enter the India market for 10 years now and have realised that it is difficult for any government to allow Walmart in India. Their experience with offline partners in India wasn’t great. That’s why they are looking at a controlling stake in Flipkart. Their experience as minority partner hasn’t been good,” he says.
As mentioned earlier, India is the last large ecommerce market that is still in its early stages of growth. Walmart needs to carve a space for itself here before it is too late. What better way to do that than by getting a pie of the online retail market leader?
Tencent, an investor in Flipkart, is also an investor in JD.com. Walmart is using Tencent’s WeChat Pay in parts of China.
Earlier this month Walmart launched its first integrated offline-online small format, Walmart Supermarket, in Shenzhen, China. According to reports, customers in the store will be able to access about 90 percent of Walmart’s inventory on JD.com. The stores offer a scan-and-go checkout process. This uses a WeChat programme that allows customers to scan barcodes as they shop along with a tech-enabled stocking system. This allows fast deliveries—less than 30 minutes for a delivery within two kilometres.
Like Paytm Mall was able to replicate Alibaba’s QR-enabled stores in India quickly, Flipkart can also launch smart stores in India with Walmart’s knowhow, alongside offline stores.
The big question is will this be enough for the two companies to fend off Amazon. If there is one area where Walmart really pales in comparison with Amazon it is in new tech like Amazon’s voice assistant, Alexa. Its smart grocery store experiment in the US is another example. Sure, such technology is not yet adopted by all those online but this is where technology is headed. If one company has shown that it can keep innovating it is Amazon—one of the reasons why it has such high market capitalisation.
Amazon’s spend on R&D, at $23 billion last year, shows how important innovation is for the company. Amazon spent the most on R&D last year, ahead of Google, Intel, Microsoft and Apple. To put that in context, Amazon’s R&D spend last year was larger than India’s current ecommerce market. This is what the Walmart-Flipkart combine is up against.