May 15, 2018
In April 2017, Flipkart raised funds from SoftBank, eBay, Tencent, and Microsoft to counter Amazon’s rapidly growing presence in India. On May 9, 2018, Walmart announced that it will jump into the fray, paying $16 billion to acquire 77% of Flipkart and finally getting the chance to sell goods to Indian consumers. This deal gives long-term investors an exit and Walmart a foothold in India. What does the news mean for the market in general and the key players in particular?
- Walmart gets access to India’s retail market. India’s online retail market was around $20 billion in 2017 (2.4% of India’s total retail market) — very small compared with other markets. But India remains the world’s fastest-growing market — only China and the US have a larger total retail opportunity — so the upside is huge for both Amazon and Flipkart. While Walmart has been trying to get into the Indian retail market for more than 10 years, the regulation preventing 100% FDI in multibrand retail made that impossible. Having tried but failed to get into India via the wholesale market with Bharti, Walmart now sees online as the only way to do so, leaving investment in Flipkart as its best option. Due to its own urgency and a competing offer from Amazon, Walmart paid a premium for market access. (Note that Amazon might have only bid for Flipkart to increase Walmart’s outlay.)
- Flipkart gets muscle in the food, grocery, and general merchandise category. This deal brings Flipkart more than money. While it already had access to sufficient funds via SoftBank, Flipkart knew it had to expand beyond smartphones and fashion in order to remain the No. 1 player in India. (In just four years, Amazon had built a 31.5% share of India’s online retail market, a close second to Flipkart’s 39.5%.) The Walmart deal gives Flipkart access to sellers, manufacturers, and the supply chain, as well as expertise on running offline stores and selling groceries. (Amazon rolled out grocery sales a year ago, but Flipkart has yet to do so.) With Amazon closing the gap in categories other than fashion, Flipkart needs Walmart if it is to remain competitive in the long term.
The deal changes a lot of things for the overall retail market in India. There are a few key themes to watch out for in the next few years:
- A consolidated retail policy from India’s government. Instead of dividing retail into buckets — single-brand, multibrand, online, marketplace, and inventory-led — the government should formulate a policy to consolidate the category. It is working on an eCommerce policy and expects to come up with a framework within six months, but it’s time to come up with a holistic retail policy. Walmart’s entry will push local retailers to sign strategic deals with global retailers, such as when Amazon bought a 5% stake in Shoppers Stop to sell private labels and exclusive brand tie-ins on a dedicated Shoppers Stop microsite on Amazon.in.
- Walmart will remain under pressure from investors. Walmart faces the challenge of selling its India story to investors every quarter; Walmart’s backers won’t have the patience of Amazon investors, who remain in thrall to Amazon’s long-term story and seem immune to its profit-and-loss statements. And with its limited success against Amazon in the US, Walmart will rely on Flipkart’s ability to execute its plans on the ground in India. Moreover, the categories in which Walmart is strong remain low in online penetration in India; a lot of infrastructure investments will be required before sales volumes increase. Although sales in India’s online grocery category have been modest — around $750 million in 2017 — the market now counts four players with major backing: Amazon, bigbasket, Grofers, and Flipkart.
- Customer experience and Amazon Prime give an advantage to Amazon. As Amazon has built the most powerful customer relationship ever, carefully constructing an ecosystem around tens of millions of customers, it will own the customer. After surpassing Flipkart in 2016 for the first time, Amazon has strengthened its position as metropolitan Indian consumers’ preferred online retail destination and is aggressively closing the gap with Flipkart to become the single largest online retailer in India in terms of sales. To compete with Amazon, Walmart must find an answer to Amazon Prime and Amazon’s customer experience. Walmart might try to fight Amazon via lower prices, the offline channel, and offering large numbers of SKUs.
For more on Indian online retail, please read our report, “Forrester Data: Online Retail Forecast, 2017 To 2022 (Asia Pacific).”