An Indian e-commerce pioneer on why Flipkart deal makes little sense for Walmart

An Indian e-commerce pioneer on why Flipkart deal makes little sense for Walmart
K Vaitheeswaran
10 May, 2018

The Walmart-Flipkart deal means different things to different stakeholders. 

For Flipkart's founders, the deal is a landmark event and they deserve all the plaudits. 

For the investors, the deal is akin to a great escape. With Amazon steadily gaining momentum in India, the investors' money could have gone down the drain in another couple of years.

For the Indian startup ecosystem, it's a seminal moment as it sends a strong message to global investors that it is possible to make big bets in India and get even bigger returns.

I would, however, add some caution here. Investors, at least in private if not publicly, will see this as a one-off transaction and not a harbinger of things to come. 

That said, I am more worried about the message that this deal may send out to Indian entrepreneurs — that not only is it fine to build massive loss-making enterprises with inflated paper valuations instead of genuine value, but it is also the way to go. 

In that sense, this deal may not be all good news for the ecosystem. The primary responsibility of entrepreneurs is to create sustainable business models in a frugal manner and unfortunately, Flipkart does not tick any of these boxes.

Ultimately, however, the deal must be viewed from the prism of the buyer and I am afraid the transaction makes little or no commercial sense for Walmart. 

Overestimated potential?

Two decades after Amazon started selling books in the US, online retail is still a single-digit percentage of the retail market in that country.

In India, despite the hype, online retail is still less than 1% of the over retail market. Even if this grows five times  - which at the estimated 26% per annum growth will take several years - we are still talking about around 6% of the retail market. 

Data for 2016 shows that Amazon gets 50 cents out of every dollar spent online in the US and they are already well-entrenched and on their way to a strong number one position in India. 

In other words, Walmart will invest around $20 billion to fight tooth and nail for a maximum share of 25% in e-commerce and for 6% of the Indian retail market. That is too much for too little. And don’t forget that Alibaba is also in the room.

Walmart’s strength is offline retail. Their best chance to fight Amazon anywhere would be to digitally integrate their physical assets and execute a high quality omnichannel strategy. 

Unfortunately, given the archaic foreign direct investment (FDI) regulations for Indian retail - it is high time the government opens up this sector completely - Walmart cannot open business-to-consumer (B2C) outlets. This means the omnichannel play will have to wait for now. 

Why not start from scratch?

Amazon has invested around $4 billion in India so far and is starting to dominate the market less than five years after setting up shop in the country. Walmart could have learnt a lesson there - why pay $20 billion for something that can be achieved at a much lower price?

At the height of the e-commerce frenzy a few years ago, Amazon, Flipkart, Snapdeal, Paytm and every other major player claimed that they had 30 million shoppers - which was the entire shopper universe in India. Not that they were making false claims, but it just shows that most Indian online shoppers are discount shoppers and shop at any site where they get good deals. 

Now here’s the math. Assume the Indian market currently has 40 million unique shoppers. All Walmart has to do to grab them is to launch Walmart.com and offer every unique shopper a smartphone worth Rs 10,000 absolutely free. 

The total investment would be less than $5 billion and in a few months, they can also claim 40 million unique shoppers because no shoppers would miss this deal.  The Walmart.com brand also gets built quickly. Of course it is unsustainable, but when did this become a stumbling block for e-commerce companies?

All marketplaces in India including Flipkart and Amazon largely sell the same merchandise from the same sellers at the same prices. Within 18 months of rapid execution, Walmart can have all the sellers on the Walmart.com site as well. A generous budget for this including employee costs would be less than $250 million. 

Why the rush?

If the grocery segment where Walmart is strong, is to be a key component of their India online play, then they will anyway need to start from scratch since it is currently not one of Flipkart's offerings. 

After acquisitions like Kosmix, Jet.com and others, Walmart has enough e-commerce technology in-house which can be rapidly deployed in India. So they really do not need Flipkart’s technological know-how. 

Time is not a factor here. If online retail will continue having a single-share of overall retail in many years from now, what is the tearing hurry to enter India today by paying so much money? 

Incidentally, on the time front, let’s not forget that Walmart could anyway get distracted for the next year dealing with regulatory scrutiny over alleged FDI infractions.

The word is that this deal is an asset play rather than an income play for Walmart. Maybe. But an asset play makes sense only if assets are acquired at market prices plus a premium. I wonder what these assets worth $20 billion are beyond technology, brand and customer base - all of which can be created at less than $5 billion within three years.

Last but not least, Walmart’s track record against online competition has been modest at best. Despite a decade of intense rivalry, Amazon continues to get ahead in the US. 

Walmart.com’s efforts at besting Alibaba in China through Yihaodian initially and JD.com have failed. Yet, there are many who feel that Walmart will now suddenly get its act together and execute so brilliantly that they will beat both Amazon and Alibaba at the same time in India. For them I have a question - what exactly are you thinking?

K Vaitheeswaran co-founded IndiaPlaza and is the author of 'Failing to Succeed - The story of India's first e-commerce company'. Views expressed are personal.


K Vaitheeswaran