WALMART’S PERSPECTIVE BEHIND ACQUISITION

Hardly two years ago, Flipkart was being written off in VC circles.
Back then growth was slowing, unit economics and profitability
remained dreams, the Amazon juggernaut was gaining market share,
and markdowns by current investors signalled to the rest of the
investing community that the company was overvalued. At the center
of it all was Tiger Global, a New York City-based hedge fund that had
bet big on Flipkart and was worried about its Indian investments. In
2017 Kalyan Krishnamurthy, who had previously worked as a director
at Tiger Global, became Flipkart’s CEO, replacing the founders, Sachin
and Binny Bansal. The taps on discounts were opened; the focus on
mobile phone sales was sharpened; and that was enough to woo
SoftBank Vision Fund, the biggest of the big fish, which invested $2.5
billion.

Now, two blockbuster deals later – first with SoftBank, which provided
some relief to Tiger, and the second with Walmart, which provides a
profitable exit to SoftBank — things have changed, and how. But apart
from ESOPs being liquidated and many millionaires being created, let
us remember that little of the valuation will find its way to India. Most
of the money will move from Walmart to Tiger Global, SoftBank
 Vision Fund and Accel, which have invested heavily in Flipkart during
the past two years. According to media reports, while Tiger Global will
make $3 billion on this deal, both SoftBank Vision Fund and Accel will
reap substantial windfalls. Flipkart’s Indian founders and employees
will end up with a small slice — perhaps around 10%

More importantly, let us assess what this transaction could mean for
Walmart, for Amazon, for the e-commerce ecosystem, for Indian
traders and manufacturers and for consumers.

 Shift in Indian E-commerce market

India’s e-commerce market size was 670bn USD. To put that into
perspective, online sales on an average day reaches around 20bn USD
.It is estimated that there will be 17% more annual growth in the
household spending in 2017-21.
Well, India is a booming market when it comes to retail industry. E-
commerce market is peanuts when compared to overall organized retail
market. And in turn, the overall retail business is 10 times bigger than the
organized retail market. As per Morgan Stanley, India’s online retail is set
to grow by 1,200% to $200 billion ( 30% CAGR) by 2026 from $15 billion
in 2016. Average wages are rising by 2% annually and internet penetration
is also growing as data costs are becoming more competitive. This makes
Indian e-commerce space lucrative.

And here in lies Walmart’s opportunity. The impressive growth rates

of e-commerce aside, the real story lies in the expected shift from
unorganized to organized trade in the country
 Source : INDIAN BRAND EQUITY FOUNDATION

With the burgeoning middle class with increasing disposable incomes

and elevated aspirations, the Indian consumer story is shifting towards
luxury brands. This is expected to be the bedrock of Walmart’s future
in India.

 ENTHUSIASM FOR INDIA

The Bentonville, Arkansas-based retail giant has been in India for over
a decade, but hasn’t managed to grab any share of the retail market.
This is primarily because of the country’s FDI rules in multi-brand
retail. In 2011, India allowed 51 percent FDI in multi-brand retail, but
allows 100 percent FDI in the wholesale segment. Walmart had a
partnership with Bharti Enterprises, but that never scaled up and the
partnership ended in 2013. Walmart still operates 21 Best Price
wholesale stores in India, but has no presence in retail. K Ganesh, serial
entrepreneur and startup investor, says: "Walmart has consistently
missed the bus. They are an iconic brand, have the cash and the market
cap, but have let others dominate the market, especially in markets
other than the US. Unless they do something drastic they will lose India
too. They should have done something like this (an investment into
Flipkart) at least four years ago, but it is better late than never. It is a
desperate situation for them.” Satish Meena, Forecast Analyst at
Forrester Research, says Walmart now realises that an offline-only play
might not happen in India. “They have been trying to enter the India
market for 10 years now and have realised that it is difficult for any
government to allow Walmart in India. Their experience with offline
partners in India wasn’t great. That’s why they are looking at a
controlling stake in Flipkart.
  FLIPKART AS THE PERFECT MODEL

Flipkart leads in the fashion vertical. Its subsidiaries Myntra and

Jabong are completely focused on that industry. Flipkart also leads in
mobile phones, which accounts for a significant portion of its total
GSV. Moreover, Flipkart has PhonePe, its payments solution, just like
Amazon and PayTm have their own solutions.

So Flipkart served as the perfect partner for Walmart to begin its

presence in Indian market. With Walmart as an investor, the risk is
lower and the value will go up. Flipkart will be in stronger position,”
Ganesh (Researcher from Wharton University) says. This is an
important point as availability of funds is no longer of great concern
for Flipkart, considering it has deep-pocketed investors in SoftBank,
Tencent and Microsoft among others. But a strategic investor ensures
that financial investors see an end.

 Sam’s Club an answer to Amazon Prime?

Amazon’s membership programme, Prime, has been a headache for

Flipkart. While Amazon has not shared exact numbers, it claims its
Prime member base now is in the millions. A person with knowledge
of Flipkart’s strategy says the company’s management knows that
they need to find an answer to Prime and soon. Walmart has had a
membership programme, Sam’s Club, for decades now. In the US,
Sam’s Club has two membership tiers, one priced at $100 and the
other at $45—quite similar to Amazon Prime membership fees in the
US. However, Sam’s Club has been an offline-based membership
model and is only now partly transitioning online. However, in China,
JD.com has already launched an online store for Sam’s Club. This
could be the solution to Flipkart’s Prime problem.
As Walmart scales in India, the company will continue to partner to
create sustained economic growth across agriculture, food, and retail.
On the forefront, the company is looking at extensive job creation
through development of supply chains, commercial opportunity, and
direct employment.