A Visitor is Silhouetted As He Walk Past the Logo of Flipkart at Surge 2016 Event For Startup Businesses at Manpho Convention Centre in Bangalore India 24 February 2016 More Than 400 Startups and 5 000 Attendees From 72 Countries Took Part in This Startups Event to Showcase Their Web Based and Mobile App Based Innovative Products Web Summit and Conference As Part of the Global Startup Ecosystem India BangaloreIndia Business Surge 2016 Bangalore - Feb 2016

NEW DELHI, India Walmart Inc.’s $16 billion deal to acquire 77 percent of Flipkart not only gives it the leading position in Indian e-commerce — it also becomes the country’s largest online player in fashion with more than 60 percent of the market.

The deal values Flipkart at $20.8 billion and includes $2 billion of new equity funding, which will help the e-tailer accelerate growth.

If the price tag weren’t enough, further indication of the importance of the acquisition to Walmart came when Douglas McMillon, the retailer’s president and chief executive officer, flew into Bengaluru, where Flipkart is headquartered, to reveal the deal late Wednesday evening India time.

“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,” he said in a statement. “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.”

The investment in Flipkart is also a resounding “yes” to growing Walmart’s presence in the fashion market in India. Fashion is the second fastest-growing segment in India’s $700 billion retail market, after food, and Flipkart has kept its lead despite a determined effort by Amazon India in the last five years to grow in the sector. Amazon — which also tried to buy Flipkart — has said it will invest $5 billion with the goal of becoming India’s largest e-tailer.

Flipkart bought apparel retailer Myntra for about $300 million in 2014 and Jabong for $70 million in 2016 and acquired eBay for an equity stake in 2017.

“Myntra and Jabong came together to form a fast-growing fashion e-commerce platform,” McMillon said in an investor call soon after Walmart’s announcement. “This is an important category to win a positive when it comes to margin mix and we believe this piece of the company is positioned well within these middle class and relatively young populations.”

McMillon added: “At Walmart we’re learning how to build and how to partner to build retail ecosystems around the world. India will now become a key center of learning for our entire company.”

The investor call made it clear that Flipkart would continue to grow without any immediate change of direction, with cofounder Binny Bansal remaining as group ceo. Sachin Bansal, the other cofounder (and no relation), announced his departure on Facebook. “Sadly my work here is done,” he said in a farewell note. His 5.5 percent stake in the company was reportedly sold for $1 billion.

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.

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.”

Industry analysts believe that Flipkart will continue to focus on its core areas of fashion and electronics, with a push into lower-cost apparel with Walmart’s backing.

It will also get additional help with supply chain and inventory management, and technology and product development, skills that Amazon India has received from its parent company.

India’s fashion retail market is worth an estimated $50 billion and is expected to grow at more than 10 percent each year. The growth stems from the country having the world’s largest youth population and a fast-growing middle class.

“The entry of international brands, changes in preferences from non-branded to branded, the fast-growing economy, large young consuming population in the country has made India a highly lucrative market. India has the world’s largest youth population, which is becoming fashion-conscious owing to mass media and social media penetration. This has opened unprecedented retail market opportunities,” said Amit Gugnani, senior vice president of fashion – textile and apparel at Technopak.

A study by Boston Consulting Group and Facebook forecast that online fashion retail will dominate e-commerce by 2020, time enough for the additional push that both Flipkart and Amazon have been making in this segment, with new alliances, private labels and a serious look at launching physical stores.

Flipkart-owned Myntra already gets a quarter of its total sales from private labels and in an innovative arrangement last year agreed to manage all the physical stores of Spanish retailer Mango. The first of these was launched in New Delhi. Last year, Myntra also opened the first physical store for its private label brand Roadster in Bengaluru. There were unconfirmed reports that the company would also open a beauty store to give an offline outlet to its more than 100 beauty brands, which include MAC, Clinique, Estée Lauder and others.

But Amazon hasn’t been sitting idle on the fashion front either.

“We have been working with top brands over the last year to make sure consumers have the widest possible selection on our platform,” Arun Sirdeshmukh, Amazon Fashion head, told WWD last year.

Amazon has been going after both the high-end fashion space — as the main sponsor of Amazon India Fashion Week organized by the Fashion Design Council of India in New Delhi twice a year; a special designer store on Amazon, and launching an exclusive 44,000-square-foot fashion studio in Gurugram to “collaborate with brands that this is next in the fashion journey for us in India,” as Sirdeshmukh explained.

This is the third such studio owned by Amazon in the world, with the other two in London and New York.

Amazon also made a tie into physical retail in September 2017 — but this was by buying 5 percent of India’s largest department store chain, Shoppers Stop. An exclusive partnership between Shoppers Stop and Amazon Seller Services Pvt. Ltd. was meant to ensure that the department store would sell more than 400 brands through a dedicated microsite on Amazon.in.

However, both Flipkart and Amazon have been playing to a world that has been inaccessible to physical retailers — both domestic and global — by reaching smaller towns and cities in remote pin codes across vast geographical areas that were unviable for physical stores. It is these customers that will now become accessible to Walmart.

Walmart has been persistent in its attempts to break into India, courting the market slowly and patiently over the last nine years. The challenges have been numerous, however.

Getting past regulations that did not allow multibrand retail in earlier years, Walmart launched in India with a joint venture with Bharti Enterprises in 2009. Their joint venture ended in 2013. There were other issues – the U.S. government’s investigation into fraud in Mexico, Brazil, China and India; an Indian government probe 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.

As analysts look at the immediate future of e-commerce in India after the deal between Walmart and Flipkart, it is expected to stick to its current path for the foreseeable future, with electronics and fashion continuing to be the main areas of focus for both Flipkart and Amazon.

“I don’t expect any sudden changes or any significant short-term shifts for the consumer or the sector,” said Devangshu Dutta, ceo of Third Eyesight, a retail consultancy company. “The Indian e-commerce sector is almost a duopoly, with Flipkart and Amazon already accounting for a very large chunk. The regulatory framework is currently structured so as to keep them focused on being marketplaces, with no more than a quarter of their business being done with related merchant entities. So in a sense, both of these are ‘wholesale platforms.'”

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 time frame 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,” Walmart noted in a statement.

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.

“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,” Sharad Kapoor, an independent retail analyst observed. “The collaboration is a big step forward — locally and globally.”

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