09 May 2018 14:29:59 IST

With Flipkart stake, Walmart set to ride India’s next retail wave

Walmart’s e-commerce deal will link producers and customers through a Flipkart-dominated tech platform

Four years ago, a retail store just a kilometre east-north-east of IIM Bangalore campus, was a thriving business. The shelves were crammed with a bewildering variety of merchandise in different pack sizes and with varying price-points. The checkout counters were always crowded, with three or four people waiting in line at any time.

Today it wears a deserted look, its shelves partially empty. There’s just one checkout counter and the billing clerk doubles as shop assistant and supervisor. What has gone wrong? Nothing you can put a finger on. It’s just the nature of the beast. One day, operations are thriving, the next, another store down the road has eaten away half your market. Today’s retail business is such that there is always another entrepreneur willing to stake his money in a similar venture nearby.

Nobody knows this better than Walmart, the giant US-based global retail store chain that, subject to regulatory approval, is set to shell out $16 billion for a 77 per cent stake in Indian e-commerce venture Flipkart. Critics have expressed surprise at the development. Their arguments are persuasive. E-commerce ventures in India are still at a nascent stage of development, accounting for around 3 per cent of total consumer spends in the retail market.

Internet penetration, even with all that Reliance has achieved with Jio, is still minuscule. With an enterprise value of $20-22 billion, Walmart is boldly investing $16 billion in what is being termed the world’s largest e-commerce deal. With India’s e-commerce market just a shade over $100 billion, it will take years for Walmart to recover its initial investment, no matter how fast the market grows.

New strategic direction

There is, of course, the argument that the Indian consumer is really heterogeneous and defies attempts at standardisation, which is at the heart of technology-driven e-commerce. This is perfectly valid. But what the sceptics are missing is the unenviable position that Walmart finds itself in, today. Imagine a company whose sales have barely budged from the level they were five years ago. Add to that the fact that its net income has slid 40 per cent during this period. Obviously, the company was badly in need of a new strategic direction. And that is precisely what Walmart has opted for now.

Walmart’s consolidated total revenues for the year ending January 31, 2014 were $476 billion. It grew to $500 billion by 2018, an increase so marginal over a five-year period as to be regarded as practically stagnant . Of greater worry for the management is that its net income from continuing operations (excluding the contribution from discontinued businesses) slid from $15.9 billion in 2014 to $9.9 billion in the year ended January 31, 2018.

While the US operations, where it has a dominant presence, could do with some fresh ideas, its global operations badly need a fresh direction. Recent corporate developments suggest it is engaged in precisely such an endeavour. For instance, the company announced recently that it is merging its wholly-owned UK subsidiary, Asda, with another UK retailer Sainsbury, resulting in the company becoming a minority partner in the combined entity. Interestingly, the merger will give Walmart a cash hoard of roughly $3 billion, which it can use to expand its global operations.

Foothold in Indian market

The Sainsbury deal gives some indication of the contours of Walmart’s new strategic thinking. One, the company hasn’t yet given up on brick-and-mortar retail, evident in its holding a stake in the combined UK entity, Sainsbury-Asda, that could potentially be worth 40 per cent of the market. Two, the company, by its own admission, is equally keen on leveraging technology (an euphemism for e-commerce or its hybrid variants) to expand its retail business. Three, growth in global operations has to come principally from two markets — China and India.

Walmart has a presence in China, although a very small minority stake in a local outfit, leaving India as completely virgin territory for its operations. But the company faces a problem with regard to entry into India. Theoretically, it is open for foreign retailers to enter India with a 51 per cent stake, domestic investors picking up the balance. This is subject to a caveat that the foreign investor has to obtain regulatory permission from the local State Governments. But most States have taken a policy decision to deny permission to foreign investors such as Walmart to set up shop.

Politically, foreign direct investment in multi-brand retail has been a contentious issue for so long that any dramatic breakthrough in the near term, with elections just a year away, is a near impossibility. How, then, can the likes of Walmart gain a toehold in the Indian market? Walmart’s interest in Flipkart has to be seen in this context.

What adds fizz to the deal is that the retail industry in India is itself undergoing churn at present. The traditional street-corner retail outlets, for all their constraints and vulnerabilities, (each outlet is just one new neighbourhood store away from bankruptcy), is far from finished as a threat to organised retail chain store businesses. India’s retail industry is littered with examples of chain stores struggling to stay afloat despite the stock market hype that grips them from time to time.

Leveraging strengths of small retailers

Added to that, modern organised retail chain stores, on the lines of American ‘big-box’ outlets, run up against the hurdle of lack of space in cities and consumers’ reluctance to drive 10-15 km to the nearest retail outlet, as their American counterparts do. So how is big retail supposed to organise itself so that it stays relevant in the market place?

Perhaps the answer lies in big retail forming a strategic alliance with a network of small stores, where the former brings technology and sourcing capability, and small retail provides cutting edge connectivity to the customer.

In other words, the future may not be a case of brick and mortar outlets versus e-commerce. Rather, we may well face a scenario where customers and producers are linked together by a technology platform that occasionally sells merchandise. For Walmart, such a future in India may well feature Flipkart in a prominent role. And its investment might make sense when viewed from such a perspective.