Walmart's Indian Outlook

Source: Clare Newstead, Thursday, May 10, 2018

Walmart has acquired Indian ecommerce retailer Flipkart in its biggest acquisition to date for USD16 billion, and the largest ecommerce deal ever, subject to regulatory approval.

Walmart will have a 77% stake in Flipkart with the remaining shares owned by businesses that include Tencent, Tiger Global Management and Microsoft, with Google also showing interest, all of which should strengthen Flipkart’s digital and technology capabilities. Flipkart’s leadership team will also remain with the business, providing critical ecommerce expertise, local knowledge and Indian consumer understanding that should aid both Flipkart’s growth and Walmart’s expansion in India.

Flipkart is India’s leading ecommerce marketplace

Flipkart operates the top ecommerce marketplace in India with both 1P and 3P sales on over 80 million products across 80 categories. It leads online sales in the mobile, large appliances and fashion categories, the largest online categories in India, and is second in consumer electronics. However, the acquisition comes at a time when Amazon is eroding Flipkart’s market lead and international and domestic players are stepping up their investment in India.

Beyond the retail website itself, Flipkart has an expanding digital ecosystem, which can be combined with Walmart’s to create an even stronger entity. It operates its own logistics arm called Ekart (as well as partnering with local third party delivery services), with 21 warehouses across India, and a new logistics centre with multiple warehouses planned.

Walmart's evolving global strategy

The move allows Walmart to establish a foothold in India’s thriving ecommerce market, which will grow at a CAGR of 17.3% (17-22e). The growth and interest by foreign retailers is being driven by India’s huge population (1.3 billion), number of internet users (over 460 million users, second-largest globally), young demographic (two-thirds aged under 35), growing smartphone penetration (30% in 2017 to 58% in 2020), and positive economic outlook. These all make it a very attractive market for foreign players. However, India’s poor transport infrastructure and prevalence of traditional retail make it a tough market to conquer. Walmart will leverage Flipkart’s local consumer and ecommerce expertise to help overcome these challenges.

The acquisition indicates Walmart’s focus on key growth markets, such as India and China, while scaling back in its slower-growing markets such as Brazil and the UK. Partnerships and acquisitions will enable it to leverage local expertise to accelerate growth in these fast-growing ecommerce markets.

A global trend is Walmart’s competition with Amazon, and in certain markets Alibaba. Its acquisition of Flipkart is indicative of this wider trend – Walmart is working with partners across industries that have vested interests in defending themselves from Amazon and Alibaba (e.g. Google in the US, Tencent and in China, and Rakuten in Japan). The move also fits with Walmart’s larger strategy of prioritising digital investments and online operations over new store openings. We expect to see more top players leveraging each other’s strengths to develop in markets with rich potential.

Flipkart is gaining investment and grocery expertise

Walmart’s investment includes USD2 billion of new equity funding, which will enable bigger investments in warehousing, supply chains, fulfilment, and assortment to better compete against Amazon. One of the keys to Amazon’s success is that its vast ecosystem provides profitable revenue streams that can offset large costs required to launch ecommerce operations in new markets like India. With support from Walmart, we expect Flipkart to make strategic acquisitions to enhance the offering, potentially including delivery platforms, payment systems, social networks and local store-based players.

Flipkart launched an online grocery operation in 2015, which was shut down 5 months later. Infrastructure and climate are challenges for online grocery in India. In November 2017 Flipkart launched a new trial in Bengaluru, re-entering the grocery category. Walmart’s expertise in the grocery category should aid Flipkart’s chance of success this time around, and bring more investment capital for cold chain and infrastructure improvements. A large proportion of consumers’ discretionary income is spent on grocery, and is forecasted to be a fast-growing online category. As Amazon India ramps up Amazon Now 2-hour delivery and Amazon Pantry programmes, and Alibaba deepens its relationship with online grocer BigBasket, the battle for online grocery dominance in India is on.

Walmart currently operates a wholesale business in India (due to 100% FDI for cash and carry wholesale trading) with 21 stores. Walmart plans to partner with kirana owners to modernise and digitise their stores, which could some day be leveraged by Flipkart for convenient pickup options and fulfilment hubs. Flipkart mainly operates in India’s largest cities. These local stores will allow for more rural expansion.

Supplier watch-outs and recommendations:

  • Currently, 100% FDI in food ecommerce retail is permitted as long as 100% of goods sold are produced or processed within India. Suppliers wanting to work with Walmart and Flipkart in India must have manufacturing facilities in the country to be allowed to sell products

  • As Flipkart expands its CPG assortment, suppliers must invest in first-mile logistics in order to overcome Indian climate and infrastructure challenges that will otherwise will lead to mass product spoilage and waste. Infrastructure investment, especially where it benefits rural communities, will be welcomed by local governments so partnerships at a regional level may facilitate faster build-out of the necessary networks to enable a modern supply chain.

  • Flipkart and Walmart will likely invest in warehousing and cold chain to combat these issues, but suppliers will need to fund their own operations to guarantee their goods reach these new modern facilities in a timely fashion whilst maintaining quality.

  • New initiatives will likely be launched gradually after the acquisition. Forward planning is key for suppliers to keep pace with how Flipkart’s grocery ecommerce offer develops. Forging tight alliances with Walmart India will help suppliers evaluate where and when investments must be made and how demand levels can be managed.

  • For Walmart suppliers wanting to enter (or re-enter) the Indian ecommerce market, suppliers should also utilise Walmart’s new relationship with Flipkart to gain knowledge of the Indian consumers, local tastes and trends, to inform product development, supply chains and marketing.

  • Indian suppliers seeking international growth can leverage Walmart’s global base to extend their products to new markets. Walmart has stated it will support Indian small businesses and the government’s ‘Make in India’ initiative through increased opportunities for exports.

  • Suppliers must tailor products to Flipkart’s target demographic. The majority of Flipkart’s shoppers are aged 35 and under and living in more urban, wealthier areas. However, in general, Indian consumers have far lower disposable incomes than other developing and developed markets so lower price points and products aimed at younger generations and will translate to more sales.