Flipkart and Walmart deal (benefit) & threat to Amazon

<<A perfect play of Horizontal Integration and Symbiotic relationship>>

(Tip: Go directly to last two paragraphs in case you want exact answers)

India’s retail sector has always been the apple of eyes of many global behemoths like AliBaba, Tesco, Amazon, Walmart, etc. And why shouldn’t that be especially when it has on offer a population of 125 crores with 65% of them less than 35 years of age.However, India’s FDI policy has never been favourable to global companies in making their presence felt. Walmart is already present in India in 21 business to business stores (not direct retail) thanks to its earlier partnership with Bharti Enterprises (dissolved in 2013), but that doesn’t contribute much to improving its customer impact in India.

The much talked about deal of Walmart buying 77% stake in Flipkart, India’s e-commerce poster-boy, is sure to make a paradigm shift in India’s online retail space. Walmart is a $500 billion giant(total revenues) having a major presence worldwide through its brick and mortar model while Flipkart is India’s biggest online giant and 3rd biggest funded company in the world. This horizontal integration of these 2 big names may save Flipkart from its ultimate nemesis, Amazon.

Both Amazon and Flipkart have their fair share of similarities including the fact that both started as online book retailer and got matured from their learning experiences. Flipkart has always been at the heart of online shopping for Indians, but the entry of Amazon into this space in 2013 changed the marketplace for better. Since its entry into India’s online market (expected to grow to $73 billion by 2022), Amazon has adapted its robust business model to suit India’s requirement (after its failed attempt in China) and penetrate into Tier 1 and 2 cities which are not as tech savvy as India’s metros.

The chart shows the market share of online retailers in India as per a report from Forrester.

Source: https://www.bloombergquint.com/b...

Clearly, Flipkart is ahead of Amazon and this lead further increases if we add the market share of Myntra and Jabong (strategic acquisitions of Flipkart). The next figure shows the trust factor of customers in India on different brands in which Flipkart is the market leader.

Source: (https://qz.com/1251913/walmart-a...)

However, what the figures don’t reveal is that Amazon has acquired the second biggest player tag in just 5 years of its operation in India and all through its own prowess. As per a report in 2017, Amazon’s Website and Mobile app are more popular than Flipkart(not adding Myntra and Jabong) and is constantly finding lovers in India’ rapidly growing online space. In terms of product categories, Amazon leads Flipkart in food items and online grocery, a segment which is expected to grow in leaps and bounds. As per a recent survey, Amazon pips Flipkart in customer satisfaction index.

Source: (https://qz.com/1251913/walmart-a...)

Amazon has tons of dollars in its kitty to keep spending in India and acquire mindspace of India’s customer which Flipkart cannot afford to do considering its recent valuation downgrade by its investors due to increasing losses.

Benefit to Walmart and Flipkart

Flipkart is not oblivious to these facts being the market leader and therefore getting the expertise of Walmart in its arsenal is the way forward for following reasons. Walmart has always been the biggest competitor of Amazon in USA and the recent deal would replicate the competition seen in their home country in India in following ways:-

1. Walmart will help Flipkart in fighting Amazon not only by pouring the funding as and when required but also by sharing its invaluable experience of handling retail market.
2. The deal between the two is a kind of symbiotic relationship which would benefit both in long term and provide expertise in areas which both of them lacked.
3. Flipkart would benefit immensely in further understanding supply chain management, product innovation and customer satisfaction.
4. Walmart can open a world of novel products at competitive prices to Indian market to take the numero-uno crown further away from Amazon.
5. Walmart will further help Flipkart in boosting its offline presence by sharing its knowledge of retail stores management and compete with domestic players like DMart, Big Bazaar, Star Bazaar, etc.
6. Walmart may also fulfil its long pending desire of opening its stores across India and selling directly to retail consumers. Due to large unorganized market of retail in India, the idea of these online monsters taking offline route makes bigger sense.

Benefit to Indian E-Commerce

The repercussions of this deal are much beyond India’s e-commerce market as it will have its waves felt across entire retail and wholesale segment.

1. Walmart with its 50 plus years of experience in handling multi brand retail outlets will revolutionize the working of small retail players by taking them onboard.
2. Walmart may introduce innovative products never before experienced by Indian consumers through its vast distribution channels.
3. Agriculture and infrastructure sectors will get a big boost due to such fierce rivalry. Farmers and small time players will benefit from increasing demand. It will definitely boost overall consumer demand.
4. The deal may shift focus OF ‘Make in India’ propaganda to major players of USA as the Indian e-commerce market is not completely dominated by USA giants: Amazon (king of online sales) and Walmart (king of offline sales).
5. Indian government would be forced to come out with a detailed policy on e-commerce now that it is going to be dominated by global companies with little say of Indian retailers.

Needless to say, the deal is a win-win situation for the current investors (who have got attractive exits) and employees of Flipkart (more bonuses) and Indian masses in general (better competition).

Thanks for reading!!!

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Answered May 6 · Upvoted by Sumit Jha, SDE-II at Amazon (2017-present) and Pavan Priyatham, former Summer Intern at Flipkart.com (2016)

I’ve spoken about this in my weekly newsletter, this week, and it’s time to ponder.

There has been major cheer with the proposed acquisition of Flipkart by Walmart, and it is indeed a good time to be an investor or early employee in Flipkart. I am slightly circumspect on what this entails for the long term of the Indian startup ecosystem, though.

On a macro level, Flipkart is (was?) the shining light for the India e-commerce story, and as the Mint succinctly puts it this is the "End of $100 billion dream". With the Bansals most likely to leave Flipkart, the two most storied Indian entrepreneurs will close their big chapter. This contrasted with Alibaba, Didi Chuxing and other Chinese giants that took advantage of local understanding and fought their way to win the Chinese markets. Were we sold too hard and fast on the Indian e-commerce dream?

Flipkart had a full 5 years before Amazon entered the Indian market, and it led the market before a few strange strategies (like going app only) allowed Amazon to claw greater market share. Flipkart has raised more than $7Bn across rounds, and estimates peg its GMV from anywhere between $7-$10Bn. In VC parlance, achieving an ARR equal to how much you had raised in so many years is incredibly capital inefficient. The $100 billion dream not being achieved is less a case of resources, and more a case of poor management.

On a deal level, I think this is an unusually expensive deal and Walmart is paying up. Flipkart has an estimated 10% gross margin, compared to Walmart's 25%. Assuming a slightly higher revenue than reported in Flipkart's filings, taking a 10% GM on a $3.5Bn revenue pegs margin at $350Mn. A valuation of 17.5Bn is 60x gross margin (a snoopy proxy for P/E given FK is loss-making). Walmart's valuation to gross margin is 2x, and if Flipkart was valued using this multiple it would be worth $700Mn. There is of course growth, synergy and other such intangibles which give the rationale for an expanded multiple - but this could be Walmart's expensive attempt at winning in online after losing the US to Amazon, and China in general.

While the acquisition will return a lot of liquidity in the ecosystem, and there will be new entrepreneurs and investors, our wait for the $100 Bn Indian internet giant will go on.

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Hema Kiran Yadla, I like flipkart to be Desi

Updated May 12

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As an Indian I love to see home grown company Flipkart to turn into a desi version of Alibaba and its founder members to reach level of Jack ma and more. This hope got further thrust after the acquisition of Myntra and Jabong but some how our desi startup got to play a second fiddle after this acquisition.

Walmart’s entry into Indian e-commerce space may change the course of events especially of swadeshi players in the online retail space such as ShopClues, Snapdeal, BigBasket and Paytm. This is a big blow.

1. The 55-year-old Walmart Inc has already grown into a behemoth whose size often inspires awe. It has 22 lakh employees making it the world's biggest employer behind US defence services and the Chinese People's Liberation Army.
2. Walmart is already the world's largest retailer operating more than 11,700 stores under 65 brands in 28 countries. If Walmart was a country, its sheer size would make it the world's 28th largest by GDP - ahead of countries like Pakistan, Bangladesh or Sri Lanka.

These two points shows the potency of the giant which entered the Indian Market therefore repercussions are bound to happen. MSMEs and Online sellers are jittery about the fact that Walmart will bring in it’s own private labels and are disturbed by the thought that Walmart will wipe the floor with them. Which is evident from the news reports with quotes a spokesperson of the All India Online Vendors' Association (AIOVA) saying, "These products would be brought in at hyper-competitive prices, which will cannibalise the market and make it difficult for other sellers to operate. We are studying the situation and will take appropriate action, including the legal route, if necessary".

This is not the first time Walmart tried to make a buck in Indian market, Walmart has for years tried to enter India but has remained confined to a 'cash-and-carry' wholesale business amid tough restrictions on foreign investment. It currently operates 21 such stores in India, mostly situated in Tier I and II cities therefore limited in reach. But after this it will command a good portion of online Shoppers.

Having said that the acquisition is in mutual interests, Flipkart does not have the war chest to fight an experienced giant like Amazon. With Walmart's backing it can give a tough fight now.

Coming to Impact:

First of all India is reeling under the pressure of unemployment with this gradually India will become the virtual battle ground for more external players and slowly small mom and pop store under go constant abrasion which is not a good sign at least in near future. But in long run this can make our manufacturers more competitive in terms of cost and quality if given good environment and proper incentives from Govt.

From the customer’s end, with better competition comes better goods both in terms of cost and quality . Indian will enjoy the products from across the world for a better price. This is an arguable point but then unfortunately we lost our fundamental right to haggle.

I am not expressing the fear of being Coco-colonised but the anguish of making a Desi coke of our own.

Its not just limited to an E-commerce business but the data which come from our purchasing patterns does count!

After all as Mr.Ambani Said “ Data is the 21st century new Oil”

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