Walmart investors may have given the thumbs-down to its $16 billion investment in India's Flipkart, the country's largest ecommerce company, with the U.S. retailer's shares falling on the news by more than 4%
But the largest transaction in the history of online retailing is not about the immediate impact on company valuations. It is a bet on the long-term -- one that is expected to shake up consumer markets in India, with its 1.2 billion people. The potential gains are matched only by the difficulties of execution, not least because of government rules on foreign investment that are still both too restrictive and excessively complicated.
While Walmart investors have their doubts, the deal will be a massive jolt in liberalizing Indian retail, one of the growing economy's more rule-bound sectors. It is impossible to say whether the Walmart-Flipkart combination will succeed in the face of tough competition from U.S. ecommerce giant Amazon, which has already established a strong foothold, as well as smaller local challengers. But it is clear that the landscape will change -- and almost certainly for the benefit of India's consumers.
After a local partnership to run consumer-oriented stores was wound up a few years ago, Walmart has been limited so far to running 21 wholesale outlets, with declared plans to open another 50. It sources supplies from India worth about $2 billion for its global stores, which compares with a reported $50 billion from China.
The Flipkart deal should give Walmart the chance of a new start in what are still the early stages of Indian organized retailing.
Forrester Research said in February that online retail sales last year totaled $20.3 billion in a total retail business of $840 billion, or barely 2% of the market. What is more, growth in online retailing slowed from over 100% annually in 2014 and 2015 to 39% in 2016 and 26.4% in 2017 -- possibly a fallout of the demonetization of large currency notes in November 2016 and new consumption taxation rules introduced last July.
Flipkart reported the market value of its sales in 2017 at $7.5 billion, with revenue of $4.6 billion, representing 50% growth. Losses since inception have been large because of a deep-discounting strategy. Like others in the business, the company has focused on revenue growth while professing to "manage" the bottom line. It has a supply chain arm that reaches 800 towns and cities, and includes in its portfolio two fashion retail sites and a mobile payment app called Phonepe (pronounced phone-pay), which Walmart has said it could take to other markets.
Walmart's investment, which includes $2 billion in fresh equity, will help Flipkart expand its range of offerings, now mostly electronic goods, mobile phones and garments.
The investment will give Walmart 77% of Flipkart, valuing the firm at $20.8 billion, but a day after the announcement SoftBank, which holds a 20.8% stake, seemed to be having second thoughts about selling out. But even if the Japanese group held back, Walmart would still end up with majority ownership.
Its intention to focus on India is made even clearer by decisions to reduce existing operations in the U.K. and Brazil -- where it is selling stores -- to what it sees as a market with a big, brighter future. The investment is also part of Walmart CEO Doug McMillon's drive to put more emphasis on online retail.
Walmart's comes just in time to stop Amazon at the door. As in some other markets, the Seattle-based seller has been ahead of Walmart in India and had made a rival bid for Flipkart at a comparable valuation of $20 billion, which some saw as a spoiler.
Flipkart itself saw possible regulatory hurdles in a deal with Amazon (the Competition Commission might view the coming together of the two largest players in the market as anti-competitive) and opted for Walmart.
Walmart may face its own hurdles, among them taxation. Flipkart is registered in Singapore, and Indian tax laws stipulate that if more than half the business of an enterprise being sold overseas is in India, then the country's capital gains taxes will apply. Flipkart has said it will comply with tax laws-which would mean it pays withholding tax on money due to the sellers of equity.
Another rule prevents ecommerce sites from being anything more than platforms where all sellers get equal treatment. Such marketplaces are not allowed to own or control merchandise, or influence the prices of goods sold on the platform. The rule has not been strictly applied, but could pose hurdles in the way of Walmart using Flipkart to sell its own merchandise, or to develop store brands. Walmart's announcement says Flipkart will continue for some months to operate as an independent business, under its existing CEO, and that integration with its existing wholesale business will be considered further down the road.
The company's moves will be watched carefully. Mom-and-pop stories in the country have traditionally had broad-based political support, including from the ruling Bharatiya Janata Party. While that is one reason for the many restrictions on organized retailing, big Indian business groups getting into the sector have also lobbied to limit foreign investment. Despite some liberalization in the sector very tight rules persist, for example stipulations for local sourcing from small businesses, and limits on the cities where stores can be opened.)
But there are no restrictions on foreign ownership of ecommerce platforms. A nationalist outfit linked to the BJP has come out with criticism of Walmart's investment (though Flipkart has already been predominantly foreign-owned, with its large investors including U.S.-based Tiger Global Management and Naspers of South Africa, apart from SoftBank). Unusually for such a large transaction by an overseas investor, no one from the government met the Walmart CEO for a photo-op.
McMillon promoted the benefits of the investment at a press conference by holding out the promise of 10 million additional jobs across the sector.
Meanwhile one of Flipkart's co-founders (who like his co-founder is an ex-Amazon employee) talked of fuelling growth with aggressive acquisitions.
Amazon, for its part, has announced fresh investment of about $400 million in its Indian business, the third instalment in six months, raising the total so far to about $3 billion and an overall commitment of $5 billion.
It is clear that the big boys of retailing have made India an important field of play, causing alarm bells to ring in the board rooms of smaller local players. The prize is the prospect of the ecommerce market growing to 30% or more of the total retail business in about a decade.
The winner cannot be predicted. But the battle itself will surely galvanize an over-regulated sector and force changes that will most likely bring consumers lower prices and more choice.
T N Ninan is a columnist and former editor of Business Standard.