2018: Walmart acquires Flipkart; 2020: Flipkart acquires Walmart India; 2022: What next?..
In early 2018, when Walmart paid $16B for a majority stake in Flipkart, it was one of the world’s largest ever ecommerce acquisition. At that time analysts believed that Walmart overpaid for its stake in Flipkart. Not only that, even Wall Street echoed the same viewpoint, when Walmart shares dropped to their lowest intraday price since October 2017, wiping $1B off its market capitalization. During that time, Walmart’s press release said that Flipkart will leverage Walmart’s “diverse retail expertise, merchandise supply-chain knowledge and financial strength”, while Flipkart’s “talent, technology, customer insights and agile and innovative culture” will benefit Walmart. Interestingly that would have meant a merger of Flipkart with Walmart India operations — leveraging the retail expertise, merchandise, supply chain knowledge of Walmart India.
So what’s changed for Walmart India in 2020?
There are multiple hypothesis to understand what is happening with each of these individual entities and how the ecommerce landscape is shaping up in India (especially with the advent of Reliance Jiomart last month). Let’s look at some of them.
Streamlining the losses: India allows 51% Foreign Direct Investments (FDI) in multi-brand retail stores, while 100% FDI is allowed in cash-and-carry wholesale ventures. This regulatory context was the starting point of Walmart B2B (Best Price Stores) in India. Interestingly in India, the cash-and-carry business is complex due to the low margin nature of the business and steep real estate costs. Over the years Walmart India nett loss has widened to $23M in 2019 while accumulated loss increased to $291M.
On the other end Flipkart Internet (business focused on seller fees, marketplace, storage and logistics) recorded a 40% rise in losses to $217M, while, Flipkart India (the wholesale arm of Flipkart) recorded 86% increase in losses to $511M in March 2019.
The consolidated loss across all these entities is approx. $750M in 2019. When you are losing so much money across your investments in India- it makes sense to consolidate execution, identify synergies, so atleast you can reduce the losses.
Flipkart owns the consumer; Walmart owns the channel: The food and grocery market is estimated to be around $500B with <1% online penetration. Grocery is a very hyperlocal game & to win in this space at scale, you need the support of the local kirana. On a smaller scale, Flipkart has partnered with around 37,000 kirana stores, of which 12,000 are in what it calls “Authorised Buy Zones”, and close to 25,000 of them are in last-mile delivery activities.
While Flipkart talks of 200M customers, Walmart Best Price talks of 1.5M members (including Kiranas (retailers), MSME & HORECA). With overlapping resources across supply chain, warehousing & manpower Flipkart is now the big brother. The success of this merger will depend on how this consolidation brings about synergies in these two segments. Integrating the 1.5M Walmart buyers would be key to increasing its reach in B2B segment- some of whom can end up being partners for its last mile delivery or assisted buying.
Competition is more agile & has “surrounded” Walmart across segments: Walmart’s only bet in India is to consolidate around Flipkart and let this business lead its India strategy. Amazon while focusing on building its local business has been consolidating its partnerships and acquisitions across categories (49% of Aditya Birla More for $560M with Samara, 49% of Future Consumer Coupons deal worth $200M and a 5% stake in Shoppers Stop in 2017). Reliance has built a war chest of $20.25B over the last 2 months for its Jio Platforms (which includes JioMart) with investments from Facebook, Microsoft and Google amongst others. Now there are already media speculations that Reliance is on the verge of acquiring Future Retail with Amazon taking a 10% stake in Reliance Retail.
Both Walmart India & Flipkart stuttered in their growth strategies — Flipkart around Grocery Market & Walmart Best Price around market growth. While, Flipkart has been at it with grocery for the last few years- beyond pilots, they are yet to launch a Pan-India offering to date- while competition Reliance Jiomart is already operational in 200+ cities. Jiomart is already clocking ~400,000 orders/day (vs. Grofers 190K & Big Basket 280K). Amazon has seen comparatively more success with its Amazon Pantry offerings (launched across 300+ cities). The same is the case with Metro Cash & Carry which is Walmart Best Price closest competitor and with a revenue of $870M claimed to have turned profitable last year.
So what next for Walmart India?
In the foreseeable future Walmart will keep bleeding with its investments in India. The interesting question is to what extent is Walmart ready to burn money in India?
US operations will drive India strategy: While Walmart’s online growth is impressive, it has been a drag on profit. According to Morgan Stanley, Walmart’s U.S. ecommerce business lost about $1.7B in 2019 vs. $1.4B in 2018. Walmart has already pinpointed to Flipkart as one of its key growth drivers as far as the e-commerce business is concerned. Flipkart did approx. $6B in GMV in 2019 and accounted for 12% of Walmart’s international revenue last quarter, but, this % will go down as Walmart continues to scale its ecommerce operations. Clearly there is reason to believe that, as long as India contributes to a significant % of Walmart’s International revenues, Flipkart would have a significant voice. But, for a US listed company generally the purse string from investors will not be open for a very long time, as growing losses will start impacting the Walmart’s P&L.
Walmart has another bigger battle to fight vs. Amazon in the US. Winning in the US is more important & profitable vs. winning in India.
A classic example is eBay, which exited India and sold off its business to Flipkart 3 years back to focus on US operations. eBay still has a small CBT business in India.
Focus on Cross Border to US: The way to survive in India would be to build an operation-which generates money in the short-term (and highly profitable). As Walmart scales up its US ecommerce operations, it would make sense to leverage supply from India. Walmart already sources apparel, home products, jewelry, hardlines and various other product categories from India for its offline stores. These souring operations service markets like U.S., Canada, Mexico, Central America and the United Kingdom. It would make immense sense to leverage the 200,000+ seller base of Flipkart to sell to international customers especially where the “Made in India” label works well — Imitation Jewelry, Gems & Precious stones, Brassware, Ethic Clothing — some catering to new markets and some catering to the global Indian diaspora. Even, Myntra has built a lot of private labels over the years (Roadster, Anouk, All About You, Mast & Harbour, Dress Berry, Kook N Keech)- would make sense to take some of these brands internationally.
Monetise PhonePe, eKart and other Flipkart offerings: Unlocking value of existing FlipKart assets, will bring more firepower to its execution in India — especially when competing with Amazon and Reliance. While PhonePe continues to grow, it’s still not seen a potential suitor for the value of $7B attributed to the same by Morgan Stanley in Sept 2019. Even in the current raise of $1.5B by Flipkart, the value attributable to PhonePe looks the same (around $2B).
On the logistics end, eKart has often been hailed as Flipkart’s secret sauce giving it an edge over other e-commerce marketplaces including Snapdeal and Amazon. Interestingly, eKart is the largest e-commerce focused logistics company in India. eKart has recorded a 78% hike in revenue to $590M in FY 19 with a loss of about $40M. Compare this with, Softbank backed Delhivery which did a revenue of $226M with a loss of $237M. Clearly eKart has a lot of monetization potential.
Build a B2B Strategy: Walmart India has about 28 stores nationwide with ~50,000 square feet of space each and about 5000 product lines. While, much has been talked about them, not sure if Flipkart needed Walmart India to build a B2B Strategy. Flipkart already has >60 operational fulfilment centers and there are stories of Walmart warehouses being converted to fulfilment centers. While, some of them might be leveraged to build a broader omni-channel play in B2B, expect a lot of them to be shuttered down due to commercial viability of these stores (low margin business with high real estate costs). Delivery focused “dark warehouses” with storage space of 2000–4000 square feet is a great way to compete with Reliance for “Flipkart Quick” service primarily focused on 2000+ SKU’s across grocery, fresh items and smartphones. For “Branded’ FMCG categories, Walmart India anyway was a “Super- Distributor” supplying to retailers who were missed by the FMCG distribution system or where price arbitrage was at play.
Walmart India core strength has been its sourcing and private labels. This is what should come handy for Flipkart, as it builds private labels for the grocery market. Combined with its investments in Ninjakart (Fresh & Vegetables), Walmart Private Labels would help build up the bottom line in a thin-margin grocery business.
Overall, Walmart has a lot on its plate currently for its India strategy. On the customer experience side they still need a tangible answer to Amazon Prime which is Amazon’s secret sauce. Would be interesting to see how the next 2 years shape up for Walmart in India. Watch this space…
Pankaj Ukey
About the author: The author is an online marketplaces, retail and omni-channel consultant. He was the former Chief Operating Officer at Fawaz Alhokair Group, Saudi Arabia and helped build their Omni-channel Fashion Marketplace. He has 25+ years of experience across FMCG, IT/ITES, Ecommerce & Startups like Nestle, Microsoft, eBay & Flipkart. You can follow him on LinkedIn.
