The beginning of this month saw a mega deal in the e-commerce space in India when Walmart announced that it was acquiring 77% of Flipkart for $16 billion. The valuation of Flipkart at $21 billion was 7x of the $3 billion revenue it declared in FY17. At this astronomical valuation, Softbank made a cool 60% return on its $2.5 billion investment within 8 months, and those invested for a longer period – Tiger Global, Naspers and Accel – made bumper returns of 230%, 260% and 525% respectively.
Flipkart was first off the blocks and the pioneer in the e-commerce space in India when it started off in October 2007, selling books on the twin premise of steep discounts and overnight delivery. Over time, to grow its capabilities and sales, Flipkart made a slew of acquisitions – books (WeRead), digital content (Chakpak, Mime360), electronics (LetsBuy), fashion (Myntra, Jabong), advertising / automation solutions (Appiterate, AdIQuity), payment solutions (PayZippy, Ngpay, FXMart, PhonePe), after sale services (Jeeves), and also experimented with grocery (Nearby), ebooks and music (Flyte). While many of these acquisitions and services were subsequently shut down or integrated back into their own platform, they’ve learnt a lot about what works. Today, they’ve a dominant share in online electronics and apparel retailing with some strong private labels – Smartbuy, MarQ, Perfect Homes, Anouk, HRX, Roadster, Dressberry etc. Along the way, they’ve also developed some serious AI capabilities to improve user experience (page personalization), product design and development (Moda Rapido) and to support logistics operations (fraud detection, delivery).
What attracts Walmart, a $500 billion traditional brick-and-mortar behemoth, towards Flipkart?
But what attracts Walmart, a $500 billion traditional brick-and-mortar behemoth, towards acquiring Flipkart? Walmart is unlike a typical PE investor acquiring only to sell at an opportune time at a higher valuation. Their own e-commerce sales were $11.5 billion in 2017 in the U.S. alone. Surely, they don’t need a Flipkart to bolster their e-commerce technology capabilities. Then, what could be the nature of disproportionate returns that they could generate from this deal? This post tries to answer that question, and it’s not as straightforward as you think. But first, let’s understand the background from Walmart’s perspective.
Walmart in India
Walmart, of course, is no stranger to India. When it entered India in 2007, its earlier astronomical growth rate was down to 10% and even this growth had been buttressed by international expansions and acquisitions that it had made. Though it was making a reasonable margin, potential decline in sales in its primary market in the USA, meant that it needed to look for newer markets and business models to drive future growth. An emerging market like India – where just 2-3% of the $350 billion retail market was organised – was a critical opportunity for Walmart.
An emerging market like India – where just 2-3% of the $350 billion retail market was organised – was a critical opportunity for Walmart.
It entered India in a 50-50 JV with Bharti and took about two years to put in place the entire supply chain, logistics and technology back-end as well as train a newly recruited Indian management team on processes. By end of 2012, they’d opened about 170 EasyDay (supermarket/hypermarket format) and 20 Best Price Modern Wholesale (cash-and-carry/wholesale format; a ‘Sam’s club’ copy) stores. The expansion came to an abrupt halt mid-2013, when news emerged that the Indian government was investigating potential violation of FDI norms as well as potential US FCPA violations. By the end of that year, Walmart exited EasyDay; subsequently Kishore Biyani’s Future Enterprises acquired this business from Bharti. However, Walmart bought out Bharti’s stake in Best Price Modern Wholesale – the cash-and-carry venture where 100% FDI was permitted – and continued to operate these stores. Since this buyout, Walmart has been keeping a low profile and working to strengthen its presence, investing to support these stores, putting in place fulfilment centres to supply online orders, and conducting direct farm and supplier development programmes to build a private label business.
Even as it exited EasyDay, Walmart bought out Bharti’s stake in Best Price Modern Wholesale stores – the cash-and-carry business, and has continued to operate those outlets.
With this toe-hold retained in India, Walmart’s return was just a matter of time.
Clash of the Titans
Meanwhile, there was a big disruption happening in retail markets worldwide – e-commerce had been expanding at a far higher rate than brick-and-mortar retail and gaining immense share. By end-2017, it was already close to a tenth of total retail sales in the US, with Amazon being the biggest gainer at the expense of department stores and specialty retailers. The e-commerce sector’s growth in India too has been relentless thanks to the table stakes cash burn strategy adopted by various players. Online retailers today capture about 2% of the retail market in India and are projected to double their share by 2020.
This growth in e-commerce is earned at the expense of brick-and-mortar retail – a loyal e-commerce shopper means loss of potential sale for the retailer. On the other hand, rising shipping costs and a touch-and-feel shopping habit imply a natural limit to growth for e-commerce. This is where Amazon and Walmart collide. In 2016, Walmart acquired an online start-up Jet.com in the US which became the foundation for its multi-pronged e-commerce strategy to fight Amazon.com, a) chase the millennial TG, b) get people to pay higher for convenience and c) reduce online shipping costs by getting people to pick up online orders at existing physical stores. With this strategy, Walmart has managed to not only grow its e-commerce sales faster than that of Amazon in the US but also safeguard sales of its brick-and-mortar stores. In China, it took a stake in JD.com to fight Alibaba.com and has rolled out a strategy similar to that in the US – sell to a large, captive user base online and use the physical store and fulfilment centre infrastructure to display, sell and provide logistics support.
Omni-channel world, dubbed “new retail”, is where the market is moving to.
Amazon too has been stepping on Walmart’s toes. In 2017, Amazon acquired Whole Foods to enter brick-and-mortar food retail business in the US. It also opened a dozen physical bookstores and is now experimenting with a cashier-free convenience store format called Amazon Go. In India, Amazon recently invested in Shoppers Stop, enabling it to offer “Amazon experience centres” across the former’s stores. There are also rumours floating that Amazon is in talks with Future Retail to acquire a small stake in it and thereby make similar use of Future Groups retail outlets viz. Food Bazaar, Big Bazaar, Easyday, Heritage and Hypercity.
This omni-channel world, dubbed “new retail”, is where the market is moving to. This has already started happening both in India and China. Modern trade retailers in India like Future Group and Avenues Supermarkets are using their neighbourhood format stores – ‘Easyday’ and ‘DMart ready’ – to act as delivery centres or pick-up points in catchment areas for their online customers. In China, Alibaba has been investing in offline stores and malls since 2015. And, this is the arena in which Amazon and Walmart are going to face off.
Walmart’s Flipkart play and how it could evolve
With that context, the Flipkart.com deal in India fits into a familiar pattern – a confrontation on hand with Amazon.in, a network of physical stores and an investment in an established e-commerce player in the geography. It allows Walmart to claw its way back into the lucrative B2C retail arena with a new weapon in its arsenal. Yes, there are the benefits of technical expertise, learning for the future (AI, payments etc.) and organisational transformation that are being projected, but I think all these are secondary to the key advantage – the data.
The key advantage is the data that has the potential to give tremendous insight into brick-and-mortar store rollout and also help Walmart develop the value proposition for private labels with precision.
Retail in India poses unique challenges – a non-homogenous consumer with diverse preferences and a long and inefficient supply chain. If you are a brand, to the aforementioned, add a steep learning curve to master the art of developing and selling products. When EasyDay opened in 2008, while the back-end operations were rock solid, Walmart struggled to cater to catchment areas efficiently with the right store design, location and in-store assortment – including its strategy for private label products which contributed higher margins.
Flipkart generates a humongous amount of data from the millions of visitors to its website – their demographic profile, their browsing patterns, their purchases and product feedback etc. In the long term, as and when regulations are relaxed and Walmart enters B2C, this data has the potential to give tremendous insight into B2C brick-and-mortar store rollout and to help Walmart develop the value proposition for private labels – product, price, specifications etc. – with precision. Thus, Walmart stands to gain far more by using the data to expand efficiently and play not just in the e-commerce space but in the organised “new retail” market which is right up its alley. Even in the short term, this data could be mined to obtain efficiencies in planning fulfilment centres, logistics operations and expansion of their B2B store formats. In fact, an announcement to open 50 more Best Price Wholesale cash-and-carry stores followed immediately after the Flipkart deal.
Grocery space is critical to win in India for both Walmart and Amazon.
Apart from this omni-channel play, there is another transformation which is likely to unfold. Food is the single largest component of the average monthly expenditure basket of Indians (infographics on monthly expenditure in Urban India can be viewed here and here), and this grocery space is critical to win in India for both Walmart and Amazon. While Amazon had lobbied heavily and obtained the requisite permissions to enter the B2C grocery sector in India a few months ago, Walmart has been investing in the back-end in this space to support its B2B cash-and-carry business, but it still lacks a B2C presence. Grocery and daily consumables are the bread and butter of the Walmart business globally and contribute 58% to sales. Its Indian acquisition, Flipkart, is currently strong in general merchandise categories such as home & apparel and technology, but these contribute less than 10% each to Walmart sales internationally. Points to some changes in the offing for Flipkart’s product mix? Coincidentally, just as I write this piece, news about Flipkart planning a relaunch of grocery services in a few cities emerged. Not to be left behind, Amazon immediately announced that it was re branding Amazon Now to Prime Now and promised to deliver grocery products in 2-hours.
Consumers stand to gain a lot with bigger discounts, better products and wider choice.
When two big players face-off, the market expands significantly thanks to the efforts they make to raise awareness and capture market share. The consumers stand to gain a lot; not only will they see better and bigger discounts but they will see better products and choice, greater convenience and improved service in the coming days. My only grouse is that there is not a true blue large Indian e-commerce player left in this fight, and those small online retailers who are left still standing will be destroyed or driven to niches.