On May 10 2018, in a single stroke, Walmart Inc (NYSE: WMT) completed its largest acquisition to date. As the international battle for a share of the e-commerce market heats up, Walmart and Amazon.com, Inc. (NASDAQ: AMZN) both turned to the world’s fastest growing economy to establish there a firm foothold. Seeking a quick entry into the Indian e-commerce market, Walmart executives agreed to shell out a staggering $17 billion in a bid to acquire a majority 77 percent stake in India’s largest e-commerce provider, Flipkart.
The move has attracted both praise and criticism from the international business community. Some claim that it was a major win over Jeff Bezos’ Amazon, who was also a frontrunner in the bid to acquire the company. Others claim that it is a useless asset for Walmart, which will add no value in the long-run.
Here are all of your questions answered about the Walmart-Flipkart deal.
With the cash reserves and assets that these business groups possess, it is no secret that both Walmart and Amazon could have targeted any other market in the world. So, why India? As it turns out, India is one of the most lucrative markets when it comes to e-commerce, especially in the coming years.
The reason for this goes back to 2014, when Narendra Modi won the parliamentary elections and became Prime Minister of India. As a part of his manifesto, Modi promised a digital push in India, pledging to bring technology into the mainstream and put it to work for the economy. As the government pushed for an increased use of technology in daily life, Modi pushed the use of digital payment methods over cash, which subsequently also enhanced the use of online shopping websites. Placed perfectly in the mix was Flipkart.com.
Between 2014 and 2018, e-commerce sales in India more than tripled, and are predicted to rise by another 141 percent by 2021, according to eMarketer.
Moving away from the more industry centric reasons to put India first, general traits inherent in India’s economy put them on top too. In statistics compiled by the World Bank, India’s household spending grew by about 8.7 percent in 2016, the fastest rate in the world, ahead of China at 7.8 percent and the U.S., lagging at 2.73 percent. Furthermore, India’s economy also led the world in GDP growth, at 7.4 percent growth in 2017.
More Importantly, Why Flipkart?
If corporations with a combined market capitalization of over $1 trillion are looking to acquire you for a price double the GDP of Fiji, you must be doing something right. And in Flipkart’s case, it is doing everything right. Flipkart, of India’s $35 billion e-commerce market, controls a stake of around 34 percent, according to Euromonitor. This makes them the largest single player in the market, ahead of both Amazon India, and Snapdeal, another local competitor. Had Amazon won the deal, Amazon would have controlled nearly 61 percent of the Indian e-commerce market. These facts show us just why this deal was so important to the two companies.
Timing and placement was also an important factor that plays into Flipkart’s success. Brick-and-mortar retail has been preferred to e-commerce in India for a long time. While the retail industry in the U.S. is perishing, it has thrived in India. The benefits of e-commerce that originated in the U.S. have yet to be fully realized in India, but the wave is about to hit.
Amazon was long a loss-maker in the U.S. market, before its fortuned changed all of a sudden and it has grown to become one of the largest corporations in the world. Flipkart is still in this phase, and it is the value from the sudden predicted growth which Walmart seeks.
Flipkart’s loss-making accounts were the biggest concern for investors. After all, why spend so much on a company that, at the end of the day, is making a loss? The answer to this lies in what Walmart can offer to Flipkart. Amazon made a loss for so long because they had to make it on their own. Flipkart, now with access to Walmart’s capital, assets, experience and supply chain systems can no doubt catalyze their growth and turn their losses into profits very soon.
Walmart’s share price did fall over 3.5% on May 8th, as news about the deal began to precipitate and investors worried about short-term gains. The company did respond, saying that Flipkart’s losses should affect Walmart only for the very short-term, with the long-term value being much greater than the short-term losses.
What About Amazon?
While Amazon executives did not comment upon losing the deal. Jeff Bezos has already committed to spending $5 billion to enhance its presence in the Indian e-commerce markets. Losing the deal is surely not a sign that Amazon will stop trying. Some have suggested that Amazon can team up with local competitor Snapdeal, but this seems highly unlikely given Snapdeal’s negligible market share when compared to Flipkart and Amazon India.
India will continue to be an important focus for Bezos and his team, and it will be interesting to see what new move Amazon pulls out to one-up Walmart after this major win. The Indian e-commerce market is surely going to be an industry which will see a lot of activity in the coming months and years.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.