NEW DELHI, India — After years of negotiating for a toehold in the $700 billion Indian retail market, Walmart Stores Inc. has finally made a strong entry by taking a majority stake in the country’s biggest e-commerce player, Flipkart.
Walmart will invest $16 billion in Flipkart, for a 77 percent stake in the company, which has been valued at $20.8 billion.
All eyes are now focused on how one of the most substantive deals in Indian retail is going to affect the market as well as the global play between Walmart and Amazon. It is expected that Flipkart’s ceo Kalyan Krishnamurthy will continue in the same role, while one of the founders, Sachin Bansal, will leave the company.
“India is one of the most attractive retail markets in the world, given its size and growth rate, and our investment is an opportunity to partner with the company that is leading transformation of e-commerce in the market,” said McMillon. “As a company, we are transforming globally to meet and exceed the needs of customers and we look forward to working with Flipkart to grow in this critical market. We are also excited to be doing this with Tencent, Tiger Global and Microsoft, which will be key strategic and technology partners. We are confident this group will provide Flipkart with enhanced strategic and competitive advantage. Our investment will benefit India providing quality, affordable goods for customers, while creating new skilled jobs and fresh opportunities for small suppliers, farmers and women entrepreneurs.”
In the fiscal year ended March 31, Flipkart recorded GMV of $7.5 billion and net sales of $4.6 billion, representing more than 50 percent year-over-year growth in both cases. With the investment, Flipkart will leverage Walmart’s omnichannel retail expertise, grocery and general merchandise supply chain knowledge and financial strength, while Flipkart’s talent, technology, customer insights and agile and innovative culture will benefit Walmart in India and across the globe.
Walmart’s investment includes $2 billion of new equity funding, which will help Flipkart accelerate growth in the future. Walmart and Flipkart are also in discussions with additional potential investors which may join the round, and could result in Walmart’s investment stake moving lower after the transaction is complete. Even so, the company would retain clear majority ownership. Tencent and Tiger Global representatives will continue on the Flipkart board, joined by new members from Walmart. The final make-up of the board has yet to be determined, but it will also include independent members.
“This investment is of immense importance for India and will help fuel our ambition to deepen our connection with buyers and sellers and to create the next wave of retail in India,” said Binny Bansal, Flipkart’s cofounder and group ceo. “While e-commerce is still a relatively small part of retail in India, we see great potential to grow. Walmart is the ideal partner for the next phase of our journey, and we look forward to working together in the years ahead to bring our strengths and learnings in retail and e-commerce to the fore.”
While Walmart and Flipkart will leverage the combined strengths of both companies, they will maintain distinct brands and operating structures. It is expected that Flipkart will head toward an initial public offering in coming years, although there is no clear timeframe for that.
“With retail changing rapidly, Walmart is actively looking for new ways to serve customers and moving with speed. The Flipkart investment represents a unique opportunity, consistent with the approach of looking for innovative ways to grow domestically and internationally, particularly in markets with significant long-term opportunity. The Flipkart investment transforms Walmart’s position in a country with more than 1.3 billion people, strong GDP growth, a growing middle class and significant runway for smartphone, Internet and e-commerce penetration,” the company noted in a statement.
To finance the investment, Walmart intends to use a combination of newly issued debt and cash on hand. Upon closing, Flipkart’s financials will be reported as part of Walmart’s International business segment. If the transaction were to close at the end of the second quarter of this fiscal year, Walmart expects a negative impact to fiscal year earnings per share of about 25 to 30 cents, which includes incremental interest expense related to the investment.
Judith McKenna, president and chief executive officer of Walmart International, noted in a statement that “Flipkart has established itself as a prominent player with a strong, entrepreneurial leadership team that is a good cultural fit with Walmart. This investment aligns with our strategy and our goal is to contribute to India’s success story, as we grow our business.”
Amazon also was bidding for a stake in Flipkart and over the last few weeks India has been the turf for these two global giants to hone their strategy, with a billion customers in their immediate line of vision.
Amazon — which has outpaced all other Indian e-tailers over the last five years except Flipkart — has made its intentions clear from the start: to be number one in the Indian market. Amazon has stated it will invest $5 billion in the Indian market to achieve its goal.
Analysts — and consumers — have noted that a U.S. retailer will now lead the e-commerce market in India — with another United States-based company, Amazon, holding the second spot. It also gives Walmart an edge over Amazon in a crucial geography, helping the retailer make up for its slow start in e-commerce.
“Flipkart is key to a global e-commerce strategy,” observed Arvind Singhal, ceo of retail consultancy Technopak. “In this deal, Walmart values Flipkart’s 100 million users and the access to perhaps the only large market they haven’t formally entered.”
Alphabet, the parent company of Google, also has invested $3 billion in Flipkart to acquire a 10 percent stake. This is expected to be a step forward in setting up a collaborative Google Express format, for same-day deliveries in India.
The victory for Walmart has been sweet, and hard-won after two years of negotiations, but it comes at a steep price — India’s total e-commerce market is valued at a little more than the negotiated amount, at about $21 billion in 2017.
However, like the Indian retail market, which has been growing in high double digits for the last 10 years, the e-commerce market has been skyrocketing and is expected to quadruple to $100 billion by 2021 and then double again to $200 billion by 2026.
Flipkart is the first of India’s first unicorn in this space.
“Walmart is approaching India as a strategic market with a long-term view, and not only would it be buying out the shares of existing investors through a secondary sale, it will be investing primary capital into Flipkart,” said Devangshu Dutta, ceo of Third Eyesight, a retail consultancy company.
Walmart has been a persistent suitor, courting the Indian market slowly and patiently over the last nine years. The challenges have been numerous.
Getting past regulations that did not allow multibrand retail in earlier years, Walmart launched in India with a joint venture with Indian company Bharti Enterprises in 2009. Their joint venture ended in 2013. There were other issues — the U.S. government’s investigation into alleged fraud by Walmart in Mexico, Brazil, China and India; an Indian government investigation of a Walmart loan to Bharti circumvented foreign investment rules, and a mandatory ruling by the Indian government that 30 percent of all sourcing by global companies be made from India, from small suppliers. The company returned to India with its own subsidiary but under present regulations is only allowed to function under the wholesale format, and has 21 stores in India.
Analysts believe that the deal with Flipkart could provide a route for the U.S. retailer to open its own stores across India. E-tailers have increasingly been turning to supplement their growth with physical retail, and Flipkart has already been experimenting with these options. Flipkart-owned Myntra has relaunched physical stores for Spanish retailer Mango in India, for example.
“With this deal, Walmart would get to expand its footprint beyond the 21-store geography and even be able to create advance inroads for the further expansion of its physical stores. It would be well-positioned, then, to create a truly consumer-facing business in India, as and when the regulations allow,” observed Dutta of Third Eyesight. “Walmart’s acquisition will also potentially provide Flipkart with additional depth of product sourcing, especially in areas such as grocery which can drive significant volumes in the future. There may be rationalization of costs at Flipkart, restructuring of supplier networks and fine-tuning of fulfillment centers, keeping in mind Walmart’s obsession with operational efficiencies.”
Over the last ten years, Flipkart — which was launched in 2007 — has set the bar for e-commerce in India, setting up the most consolidated learning curve for Indian customers and keeping its lead in the two biggest categories, electronics and fashion.
Two strategic acquisitions, including front-runners in the fashion e-commerce market — Myntra and Jabong — have helped Flipkart keep its lead in the fashion segment, in which Amazon has been investing for faster growth.
Preparations for the sale of Flipkart shares have been in the works for weeks, with a buyback of shares worth $350.46 million from investors to clear the path for a larger ownership by the new investor. Japan’s Softbank owns a 20 percent stake in the company, and is expected to exit the entire amount with a profit of more than 1.5 times. In 2017, Softbank invested $2.5 billion in Flipkart in 2017.
“I believe, after China in terms of size, India should be next, and in a market with such huge potential Flipkart has 60 percent market share, which is a good start,” said Masayoshi Son, chairman of Softbank, in discussing the company’s second-quarter results.
Other investors include New York-based investment firm Tiger Global and South African Internet conglomerate Naspers. Both the founders, Sachin Bansal and Binny Bansal (who are not related, and are former Amazon employees) own 5 percent each.
Looking ahead, analysts note that winning is not always about money, and can have its own pitfalls.
There has been no love lost between smaller traders and organized retailers in the past, and traders in India have often marked out Walmart as the target of their ire against organized retail in India, which is still less than 8 percent of the total. There have been rumblings of protest these past weeks, even before the deal was confirmed. With Indian elections around the corner, in 2019, analysts note that the global players will have to walk their path with care in the coming year.
As market leader, Flipkart posted revenues of $2.9 billion in the financial year ending March 31, 2017, but it also showed a loss of $1.3 billion. “Although Flipkart has maintained its lead in the Indian market, many consumers have been steadily turning to Amazon, describing the lack of ease in negotiating the Flipkart interface, search capability and declining quality of service,” said Sharad Kapoor, an independent retail analyst.
But in the end, consumers, Flipkart and the e-commerce sector are expected to benefit as much as Walmart itself. “What would Walmart offer Indian customers that they don’t already have? Customers believe that they would get better service, cheaper products and more global brands.
Flipkart will benefit from deep pockets of Walmart as well as the U.S. retail giant’s decades of retailing expertise in skills from logistics to marketing,” Kapoor observed. “The collaboration is a big step forward — locally and globally.”