Walmart’s passage to India - the timing isn’t great, but the opportunity is

Stuart Lauchlan Profile picture for user slauchlan June 10, 2018
Summary:
Walmart’s deal to buy a majority holding in Flipkart is just part of a wider overhaul of its international strategic thinking.

Walmart Inc President and CEO Doug McMillon with Flipkart Group CEO Binny Bansal.
Walmart President Doug McMillon and Flipkart Group CEO Binny Bansal.

U.S retailer Walmart has been shaking up its international thinking over the past few months, most notably with its planned acquisition of 77% of Indian e-commerce giant Flipkart, a move that opens up a new front in the online war with Amazon.

Elsewhere there are changes afoot. Last month it announced plans to lose majority control of its UK grocery arm Asda to a merger with rival Sainsbury’s that will leave it with a 42% stake in the resulting combined entity. It’s also decided to take a $4.5 billion hit on its Brazilian operation, selling 80% of Walmart Brazil to Advent, a São Paulo-based private equity group.

Against all this activity, it’s to India that attention now turns. This is the biggest roll of the dice there that Walmart has made, but not the first. Back in 2007, it aimed to secure a foothold via a partnership with Bharti Enterprises that was ultimately undermined by regulations aimed at protecting smaller local retailers, many of whom are hoping the same thing might happen with the Flipkart takeover.

A petition has been filed with the Competition Commission of India by by the Confederation of All India Traders (CAIT), which represents about 70 million merchants, warning that Walmart would “create an unfair competition and uneven level playing field, and will indulge in predatory pricing, deep discounts.”

Big deal

Flipkart is a whole different ball game for Walmart. Founded in 2007 by Sachin and Binny Bansal, two former Amazon workers, Flipkart has become a dominant force in the lucrative Indian e-commerce market.

Analysts at Forrester Research predict that Indian ecommerce sales will amount to $27 billion and grow at 26% per year over the next five years. If that’s true, it would make India the fastest growing large e-commerce market, if still way behind the likes of China in terms of overall value.

From Walmart’s point of view, it’s looking to level the playing field between U.S. and Competition Commission of India. e-commerce sales. For its most recent quarter, $1 billion out of $30.2 billion of international revenues came from e-commerce. In contrast, U.S. e-commerce revenues came in at $3.2 billion. Flipkart’s currently turning in sales of $4.6 billion per annum on a year-on-year growth rate of 50%.

Amazon made its move into India back in 2013 and current has around $5 billion committed to growing the operation there. The U.S. firm was also interested in acquiring Flipkart, so Walmart’s ultimate success is a strategic win, even it’s one that a lot of investors have raised quizzical eyebrows over.

It’s clear that Walmart’s management are aware that there’s some convincing to be done here that this is a sound investment. President Doug McMillon argues that Flipkart is a big enough deal for it to be worth playing a long game:

We basically want to be in places that have a tremendous opportunity, which is what led us to Flipkart in India. And when you look at the size of the market, $1.3 billion, you look at the GDP growth in the market, look at retail growth in the market, look at e-commerce growth in the market, and then you start to understand that Flipkart has a strong management team. They built out an ecosystem. It’s not just a pure e-commerce business, but there are complementary platforms within that business.

Our time horizon may be a little different than some [investors] may want it to be. But we have a view that a good investment should be made even if it takes a little bit of time to pay back, but it should be big enough to matter. So we’ll be much more interested in doing a few big bets than lot of little things as we try to maintain focus for the company.

Walmart did contemplate making a move on Flipkart back in 2016, but that didn’t come to pass. So why now? McMillon says the timing is now considered ripe:

Given the amount of investment that would be needed to win in India, what the plan was that Flipkart had, the contingencies that could happen as a result of our entry, would that put pressure on our ability to win in the US, which is our most important market?So that was one of the key debates. When it comes to the time horizon, we have a plan. We’ve seen Flipkart’s plan as it relates to how we would scale it and what profit and loss would look like that we’re comfortable with.

Unspoken is the fact that the Amazon-Ian predator was also circling Flipkart and that Walmart might have been running out of time if it was to make a successful move. McMillon concedes:

Sometimes, you don’t get to pick the timing of these things. They emerge, and you either do them or you don’t do them. In the case of India, it’s worth it. If it had been a smaller market, we may have passed. But this is a unique opportunity. When you look out five, 10, 20 years from now, time will tell. But we’re confident that we’ll look back at it and say, “Yes, that was a big bet. It was a bold bet.” Timing might have been earlier than we had wanted it to be otherwise. But we’re glad we took it. We’re not running this thing for one year.

Why Flipkart?

For Walmart International President Judith McKenna, the drill-down on India is a no-brainier:

If you’re in international business and growth is one of your objectives, then India is a market in which you want to operate. It was the right time for us to go in now as e-commerce is still developing in that market, in addition to the fact that it’s a growing-quickly economy. On e-commerce, we’ve got penetration of around about 2%, and that’s forecast to grow rapidly.

But it’s not just about e-commerce, she adds - this is an omni-channel gambit:

What we’re really interested in as we’ve got to understand this business better is it’s actually creating a platform, an ecosystem, if you like, of operating within that market.

There are two trading arms within Flipkart. You can see those under the general e-commerce flag of Flipkart itself, which is primarily a general merchandise site and by far the biggest part of the business. But then there’s Myntra and Jabong. Myntra and Jabong are apparel, clothing retailers. They’re really interesting in the speed they’re growing at and the mix that they provide with the overall e-commerce business as well.

Then there’s the infrastructure angle:

You’ve got an infrastructure part, which is eKart. eKart is the logistics arm of Flipkart. It operates over 800 cities already. It is about 0.5 million deliveries a year, but it’s unique to Flipkart, in that it’s got its own logistics network that sits behind the trading platform. The final part of the equation that creates the platform is called PhonePe. PhonePe is the payments business. Now its primary function is to facilitate payments within the Flipkart group, but it’s actually also an open system.

For its part, Walmart also plans to expand its physical presence in India, says McKenna:

On India physical stores, we’ve got 21 cash-and-carry stores today in India and we’ve already announced that we’re going to do about 50 more stores over the next couple of years. So Walmart India, the cash-and-carry stores, and Flipkart in the short-to-medium term will remain separate entities and will trade separately, although clearly sharing ideas and getting synergy where we can. We know we need to be patient in India.

The big question now is whether that patience will be forthcoming from investors. McMillon is quick to reassure that this is essentially a one-off investment, not the start of similar costly gambits around the globe:

As it relates to where does it stop, I think you can step back and look at the world and ask, ‘;How many opportunities are there in the world with a population and growth rate like India?’ And the answer is, ‘Not very many’.. We’re in China. We like our position in China. We’ll keep working on that particular market, but if you step back and ask priorities, it’s the US, Canada, Walmex, including Central America, China, and India. Those are our priorities.

My take

Getting into the Indian market and securing a stronghold is a sound international proposition, but for many Walmart investors, there’s already more than enough to be getting on with back in the domestic market for such foreign adventuring to be a priority. McMillon and his team have a lot of skeptics watching what’s happening and still have a lot of convincing to do about the wisdom of this passage to India.

A grey colored placeholder image