Following the recent announcement that Walmart has entered into a definitive agreement to acquire a 77% stake in Flipkart,
Suresh Sankara Retail Market Analyst at GlobalData a leading data and analytics company offers his assessment on the deal,
“It’s Amazon vs. Alibaba vs. Walmart in the Indian online retail landscape with Walmart’s agreement to become the largest stakeholder in Flipkart.”
This follows yesterday’s news (9 May 2018) that Walmart has entered into a definitive agreement to acquire a 77% stake in Flipkart and become the largest stakeholder for a deal consideration of US$16 billion, the largest transaction in the online retail space globally. About US$2 billion of the total investment goes into equity funding to drive business growth, while the rest will be paid to existing investors and stakeholders to take over their shares.
“Walmart initially ventured into India in 2007 through its brick and mortar stores but could not succeed due to FDI regulations in the country. However, Walmart’s latest investment in Flipkart gives it immediate access to the Indian online market, one of the largest and the fastest growing in the world”.
According to GlobalData estimates, the online retail market is India is valued at US$10,488.5 million in 2017 and is forecast to reach US$35,460.4 million by 2021 at a CAGR of 35.6%. The move follows Walmart’s April announcement to sell ASDA to Sainsbury’s in the UK, underpinning its strategy to divest in non performing business units and focus on potential growth prospects. The move also helps it to shift focus from the already mature Western markets and take on its global rival, Amazon.”
Flipkart first ventured into the Indian e-commerce space as a book seller and gradually forayed into the entire spectrum of retail categories such as fashion, electronics, home etc. and currently enjoys a leading position in these categories. It recently entered into food & grocery and is making quick strides to gain market share in the category. Now, being a part of Walmart, Flipkart can combine its online delivery expertise with Walmart’s vast food & grocery product base to tap the potential in online food & grocery space. This will also help to take on Amazon Pantry and Big Basket, which received significant capital infuse from Alibaba in Feb 2018.
From a synergy point of view, Walmart can leverage Flipkart’s existing market base and its online distribution channel, while Flipkart can leverage Walmart’s scale, strategic support, supply chain and retail prowess, benefitting the Indian online market as a whole in the long run. Also, a new loyalty program such as the Amazon Prime Membership can help to quickly gain an edge in the market.
As far as the investors’ sentiment is considered, Walmart’s shares took a plunge on the New York Stock Exchange resulting in Walmart’s market capitalization to dip by US$10 billion. Investors are not positive about the move and stated that it is about reducing loss levels for the moment, before actually making profits out of Flipkart. Several Wall Street analysts also commented Walmart paid a hefty price for the deal; however, it is viewed as a bold and brilliant move, and is expected to reap in huge ROI in the long run, considering the enormous potential for the growth of online retail in India.
There are also a few challenges that Walmart and other in-store players have to reckon with. Flipkart is only in its initial stages of food & grocery segment and they are yet to fully develop an efficient ecosystem for hassle free delivery system, creating a time gap before taking advantage of Walmart’s forte in food & grocery. The investment also gives a huge boost to Flipkart’s operations and expansion plans, posing competitive challenges to fast emerging in-store retailers such as Future Group’s Big Bazaar, DMart, Reliance Fresh etc.
Market shares of key online players in Indian retail industry (2016):
Amazon: 9.01%; Flipkart Group: 10.04% (Flipkart: 5.89%; Myntra: 2.24%; Jabong: 1.91%); Snapdeal.com: 2.97%
Flipkart’s market share in online sales in India by retail categories (2016):
Clothing: 5.85%; Electricals: 4.69%; Health &Beauty: 14.74%; Home: 11.62%
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