The Walmart Flipkart Deal implications Flashcards
Flipkart, India’s online market place founded in 2007 by two former Amazon employees, is currently losing money and is expected to generate losses at least in the next few years. So, what explains the optimism and the hefty price tag?
Walmart hopes to leverage Flipkart’s fashion business, as well as its digital payments infrastructure and local talent pool.
**The Indian company has 54 million active users across all brands and recorded gross merchandise value, a proxy for total sales, of $7.5 billion and net sales of $4.6 billion, # representing more than 50% year-over-year growth in both cases for the year ended March 31.
The deal is essentially an investment in the future and is predicated on forecasts of a massive growth in the e-commerce in India. Morgan Stanley has estimated that India’s e-commerce market will grow to $200 billion in about a decade from about $30 billion today. That’s a massive jump. Similarly, India’s online grocery market is miniscule at around $100 million but is expected to be worth billions in the coming years.
Whether such numbers play out remains to be seen. India’s broadband infrastructure is rickety at best and it is unclear how much of the online consumers would come from rural areas where a large part of the population resides.
The size and purchasing power of India’s middle class is also debateable. The Economist in an article titled “India’s missing middle class” pointed out that a lot of the middle class in India has little money to spend. It said “there are many rich people in India—but they number in the mere millions.”
Protests :
- Protesters are concerned that predatory pricing and steep discounting by e-commerce firms with deep pockets such as Amazon and Walmart could edge out smaller rivals and local multibrand retailers.
The government has already taken action on this score prohibiting marketplaces from offering discounts and capping total sales originating from a group company or one vendor at 25% even though critics argue that there are ways around this.
- Ever since the announcement of the Flipkart-Walmart deal, there has been much doomsday talk in India Inc, largely along the lines of “the foreigners have taken over and now that is the end of Indian e-commerce business, so sadly nipped in the bud”.
- The thesis propounded is that when these two elephants fight, they will trample over all the small entrepreneurial Indian ants. Also, the two foreign owners will not do what’s right for the Indian market and a vibrant Indian (local) ecosystem of e-commerce will never develop.
So…what is the remedy the doomsday sayers are giving?
They’re saying the remedy is to have laws that prevent the “dumping of capital” (almost always otherwise called foreign direct investment, something our prime minister spins around the world for, hard-selling India).
***Finally, it extols – hold your breath – Reliance Jio as a role model for good business practices by an Indian owner and fuelled by desi capital.
** They exhibit a xenophobia reminiscent of the Bombay Club days and are unexpected coming from people who have till recently insisted that the free market is the only way to go and that India must embrace globalisation.
These arguments underestimate the intrepid Indian entrepreneur, especially of the millennial kind, by making the assumption that Flipkart was the first and last Indian retail entrepreneur left standing.
*** Indian e-commerce industry is already off the ground with a thousand flowers in various stages of budding – proof of concept done, interesting, sharp and well-differentiated consumer offerings with business models that work and deliver, but still at a very small scale, stuck for want of capital (which in turn could buy them good advice and good people).
The question is what can we do to let these thousand flowers bloom?
To mix a metaphor, India’s e-commerce has just taken off but what will it take to give it enough fuel to prevent crash landings? It needs more than Mudra bank in its current avatar, and more than the present banking system reeling from big boy non-performing assets and discovering credit appraisal and prudence when it comes to small and medium enterprises. It needs infrastructure and capital. It certainly doesn’t need, as suggested by some, an anti-dumping law on foreign capital.
Retail needs patient capital – it is a business where you have to invest for a long stretch upfront to build enough scale to be able to buy cheap and sell cheap, and to sustain the levels of service and speed that Amazon has got us used to.
The real issue is : Predatory pricing
predatory pricing which destroys the healthy competitiveness of a market should be stopped – and that’s what the Competition Commission of India should decide. And surely they will appreciate the difference between someone selling at a loss to kill competition and someone who can sell far cheaper because of the competitive advantage of cheaper sourcing due to globally integrated supply chains or more imaginative local sourcing or pouring money into vendor development and finance (not to be written off in advance against future subsidies).
Yes, two foreign giants will fight for supremacy in the Indian market, but please relax. Neither can behave like the asset-stripping East India Company. They will serve Indian consumers better, buy and sell local produce (cow dung cakes, Kerala red rice, fake mangalsutras, grinders locally made for idli and dosa grinding, gangajal are all available on Amazon) and the Indian consumer is known to force global giants to adapt. They will create employment (not just for a large Indian operation but to serve some of its global operations yet), and develop vendors.
As for losing the chance of being a global innovation hub :
We now have an even better chance of being a global innovation hub then before, with cash-starved pigmy businesses running around the place dressing up for the IPO party.
*** Customers clearly don’t care what the colour of their money or the skin of their parent company is. And from now on, given the exceedingly local nature of a large part of their product mix, more small businesses will gain than ever before in the era of wholly Indian retail.
Retailers beware:
But both companies will be squeezing supplier companies to offer the best possible deal to them. So while the business could be big in total volume, the profitability could be tiny or non-existent. That’s a dangerous bargain: that Walmart loves you so much they hollow out your business, even as they grow it. There is a long history of that in the U.S. in the world of physical stores.
You can’t ever beat Walmart on price. You can’t undersell them. You have to compete with other things: you can offer things they don’t — special products, good explanation and guidance, help finding the right thing, satisfaction, freshness, original designs, and a good shopping experience. Plenty of U.S. stores, even small ones, have survived Walmart. But not by standing still. They’ve had to compete by offering customers something the giants don’t: the human touch, a smile and originality.
If you’re a company in India that makes products for consumers, this competition will be dangerous. Being sold by Walmart/Flipkart and Amazon could be great for your sales — a big audience, good display, easy to find, a huge market. And a good relationship could mean that either Walmart or Amazon decides to sell your products outside India, in even bigger markets, like the U.S. or China.
