The clash between US-based ‘corporate frenemies’ has attained a global shape, as Walmart secures a deal of Brobdingnagian proportions in India. Out on a phenomenal shopping spree, Walmart, the US $500 billion retail company, has incurred US $16 billion to purchase a majority stake in Flipkart, India’s largest online retail store. The US-headquartered retail behemoth had attained the reputation of being kind of an underdog in the M&A market. It has thus raised eyebrows across the globe for being involved in such a mammoth acquisition of Flipkart, which in the pages of the company’s history, will be penned, as its largest.
Consider Walmart’s arch rival, Amazon, which in merely 24 years of existence has acquired 85 companies so far, with global home-security company, Ring (formerly Doorbot), being its latest scalp. Relatively older opponent, Walmart has acquired no more than 15 companies in its 56-year old history. Its next-biggest acquisition was a US $9.1 billion procurement of British supermarket retailer, Asda. Flipkart’s acquisition is close to twice of Asda. Walmart otherwise has made minor acquisitions in the US, which are largely pillared around category expansion.
Why did Walmart spend such exorbitant sums?
Walmart is betting big on the skyrocketing growth of India’s e-commerce industry, which has enjoyed an uphill growth trajectory; it is projected to outshine the US to become the world’s second largest e-commerce market by 2034. It is expected to grow from a modest US $38.5 billion in 2017 to US $200 billion by 2026. Walmart’s President-CEO Doug McMillon testified that India is “one of the most attractive retail markets in the world, given its size and growth rate”.
India is home to a bourgeoning middle class, marked by significant growth in household outlay, and its growth is a noticeably swifter than that of their relatively mature US counterpart (see Figure 1).
However, over the last couple of years, the Indian e-commerce industry has observed a slowdown due to a host of regulatory actions. Revised FDI guidelines, full-scale demonetisation, which extracted cash out of consumers’ hands (while increasing the demand for mobile wallet transactions by approximately 20%), and the latest GST regime have triggered a gradual decline in consumer spending.
The logical follow-up question would have been “Why not China?” While China is almost at par with India in terms of household spending (see Figure 2), Walmart is not much flattered by the statistics. The US-based retailer has hit multiple roadblocks in fathoming the behavioural dynamics of Chinese consumers, which are not always price-fuelled, as we might imagine. Chinese customers have exhibited a penchant for customised local products in retail environments on several occasions. To make matters worse for Walmart, a local hypermarket operator, Sun Art has aped Walmart’s business model and has developed a better understanding of Chinese consumer behaviour, ensuing them to successfully poach Walmart’s customers. Naturally, the next best destination is India.
Nonetheless, India continues to boast of the fastest growing e-commerce sectors in Australasia (Figure 3).
More importantly, in the current Indian e-commerce segment, Walmart is to Amazon as David is to Goliath. Walmart India owns and operates 21 Best Price modern wholesale stores offering over 5,000 items at best prices in a “Cash & Carry” wholesale format. With a futile Bharti deal in the past and no other retail presence in the country, this whopper of an arrangement would expedite Walmart’s ability to leap ahead in the embryonic e-commerce market consisting of over 100 million customers. It sets the stage for a frontal battle with Amazon, the reigning global leader in the online retail sphere, accounting for 44% of the US e-commerce retail market. It also underlines the reliance that Walmart has on the flourishing Indian consumer market.
What is so special about Walmart?
On second thought, this is almost a rhetorical question. Walmart, in addition to substantial capital, shall augment its prowess in nurturing a strong food supply chain. This comes in at a crucial time, given the sudden spike in demand for the hyperlocal business in India. More relevant is the fact that Amazon is upgrading its hyperlocal grocery delivery operations in India. It shall deliver fresh fruits and vegetables along with other daily essentials from its own stores as well as from third party stores such as HyperCity and Big Bazaar, by virtue of its homespun Amazon Now application. It is still in a rudimentary stage however, given that the service is confined to a few select metro cities such as Bengaluru, Hyderabad, Mumbai and Delhi-NCR region. This is thus, an opportune moment for Walmart to scale up operations in the online groceries market in India. Rajneesh Kumar, the Chief of Corporate Affairs at Walmart aspires to “become the best food retailer in the world, and that needs investment in supply chains to build those capabilities.”
While sellers at Flipkart can be reassured that there shall be no major amendments in the operational mechanisms as a consequence of the deal, Walmart shall persevere to reinforce its wholesale cash-and-carry business, strategically planning to expand the total number of stores from 21 to 50 by 2020-21. Flipkart, on the other hand, shall continue its operations as a distinct organization with an autonomous board, with co-founder Binny Bansal at the helm of affairs (Group CEO).
Yet, with Walmart’s 77% majority stake in Flipkart, there shall definitively be a revolution in the retail landscape of India. Walmart brings along with it seven decades of priceless retail experience, which it shall leverage on momentous realms of the Indian e-commerce sector. One must not forget that Walmart brings along with it an unquestionable competitive advantage in terms of its established brick-and-mortar infrastructure. While Amazon may be expanding at a brisk pace, Walmart now has the added advantage of a robust online presence, which they have primarily reaped from Flipkart. Prior to the deal, Walmart was crippled by the stringent retail policy in India that did not permit overseas companies to sell directly to domestic consumers (except in wholesale cash-and-carry segment). Therefore, while Amazon maintains its big-ticket investments in state-of-the-art distribution hubs and drone technology, Walmart has adopted an evidently low-cost strategy, where it concentrates its technology investments in ameliorating existing store environments. With Bangladesh now right next door, Walmart can bring to the table a plethora of private label brands at competitive prices. While one would label this as a predatory move, Walmart would beget a sea change in India’s retail ecosystem, especially in terms of cultivating a strong back-end supply chain and better management of inventory.
There are certain interesting things about Walmart already, though, that would help them establish their point of difference in India’s retail milieu. Realising their mistakes in Germany and China, Walmart in India has already adopted a polycentric orientation by offering products to customers purely based on their needs. In fact, they make certain that they offer regional products at competitive prices, which are locally sourced. The company also strives to offer farm-fresh fruits and vegetables, sourced directly from farmers across