Flipkart-Walmart Deal : Who Won?

 

“Flipkart-Walmart Deal : Investors, Founders or Consumers, Who won?”

As the old cliche goes, “A satisfied customer is the best business strategy of all.”

Holds true?

Well, the game has been changed, “satisfied customer” is no more a strategy but a word.

In this era of globalization and Internet, where the whole world is becoming a single market place, having a vision of creating “satisfied customer” doesn’t work anymore.

Yes, but to understand the market scenario and winning strategy of an organization, You have to understand a simple fact that says :

“Whenever you see a successful business, someone once made a courageous decision.”

So, Is Flipkart- Walmart Deal a Courageous decision?

Let’s understand this into three categories :-

1. WHY this deal happened?
2. HOW does it matter for Indian Economy?
3. WHAT do consumers/customers get?

Let’s start this ride, hold your seat belt tight. 🙂

So, Walmart has paid $16 billion (about Rs 1.05 lakh crore) for an initial stake of roughly 77% of Flipkart. And Flipkart co-founder Binny Bansal, China’s Tencent Holdings, Tiger Global Management and Microsoft will hold the remaining shares in the company.

One has to admire the foresight, grit, perseverance and “guts of steel” of Sachin and Binny Bansal for creating a mind-boggling valuation of $ 20 billion in a relatively short period. Unlike “doomsday” critics who look at the Walmart-Flipkart deal as a “sell-out of the country’s jewels” I feel the takeover has a lot of positives for us all (Atleast for now.)

So WHY?

Why would Walmart, a global retail giant, take a $16bn punt on an Indian upstart? This question has been hogging the limelight since the biggest deal in global e-commerce has taken place.

Why would Walmart, with almost $10bn worth of net income in FY2017, invest so much effort in sealing this onerous deal? All the more surprising, when we consider it’s a firm with GMV of $7.5bn and a loss of staggering $1.5bn, and is being bought at a bloated valuation of $20bn – all cash!

Well, the devil lies in the details. Read on…

Walmart sees India as one of the biggest future markets. It is a bet it has made on India’s future seeing the promising growth. Walmart has used the Flipkart acquisition to enter the second most populous country in the world which offers a huge market.

Flipkart already has a well established vast customer base in India so Walmart does not need to start from the scratch. Also taking over Flipkart gives it a well equipped chance to lock horns with its long time global rival Amazon which is already doing quite well in India. Walmart with the biggest e-commerce acquisition in history, has made it clear that it eyes India as a great potential market and has entrusted its trust in India’s growth potential. Walmart is sure to benefit from the acquisition in the long run.

E-commerce is just the first step

India’s e-commerce market size was just $17bn in 2017. To put that into perspective, Alibaba’s Singles Day Sale alone amassed $25bn. Then why, so much brouhaha?

Well, India is a peculiar market when it comes to retail industry. E-commerce market is peanuts when compared to overall organized retail market. And in turn, the overall retail business is 10 times bigger than the organized retail market.

There are many reasons but to summarise :-

It’s a great deal. Giving Room for Flipkart to enter Retail business and into International Market as well.

What Walmart earns, its 5% costs Flipkart’s 100% revenue. So you can imagine the value.

Also Flipkart is getting the trust which Walmart has built across the globe.

And at last now it would be much easier for Flipkart to compete with Amazon, this is the reason of Flipkart’s not being merged with Amazon even it was providing $21.5 billion deal.

So, overall it seems for the sake of overall benefit and gaining trust in international markets, as of now.

So overall, Flipkart is by far the most-complicated start-up to analyse but the Fundamentals remain the same. Flipkart is trying to build a habit of buying Online into Indians. Investors too are funding this. Online retail sales today accounts to only 2.2% of the Entire retail sales in India. If it were to increase to even 9-10% (which is present in USA) then it would mean a jump of 400-500% in the revenues of E-tailers in India. This is what investors are hoping of.

And why Sachin Bansal dropped?

Sachin was deeply involved in negotiations with Walmart even a few weeks ago.

Even until final discussions sachin wanted to buy more shares and remain with Flipkart.

But it was Walmart who wanted only 1 co-founder on the ship, they were keen on retaining current CEO of the group Binny Bansal. Also, American giant will love to hold current Flipkart’s CEO Kalyan Krishnamurthy given his past stint with Tiger Global and eBay. They have reportedly offer him a retention bonus of 2 millions if he stays for next 3 years.

After stepping down from CEO’s position in 2016 sachin was mostly involved in decision to bring more investments in the company. Walmart saw him as a strategic guy, they already have global strategic leaders and have their rational to leave sachin.

While binny and Kalyan will play a marquee role in operations.

This is what sachin said on his Facebook post:

2. HOW?

If you are under the impression that the takeover deal is going to result in an inflow of $ 16 billion into India, then you are grossly mistaken. Because, although founded by the Bansals of India, Flipkart India has been a wholly owned subsidiary of Flipkart Singapore.

A lot of Indians establish their companies in India via a “holding company” in tax heaven, highly liberalized countries like Singapore, Mauritius, etc. Apparently this helps them save taxes, avoid regulatory procedures or even protect their assets from financial/legal encumbrances.

Here is a crude shareholding structure of Flipkart at present:

Acquisition of Flipkart by Walmart can very well be a game changer in the Indian E-Commerce scenario. These points will summarise the key aspects-

• Walmart is the world’s largest company by revenue. It’s official entry into the Indian market will be a breaking point in putting Flipkart on profits. The deep discounts offered by Flipkart were not sustainable, and that was the reason they could not make profits despite being in the business for a decade. This scenario shall change with the advent of the acquisition.
• As the two US giants now lock horns in the Indian market, it would be interesting to see the benefits they offer to expand their respective customer bases. This competition will see both the juggernauts bending more towards customer satisfaction in this fight of supremacy. Who would be the winner is unknown, but the gainer is undoubtedly the Indian customer base.
• One thing Walmart excells in is Online Food and Grocery sale. Indian market may be on the verge of witnessing a revolution in this sector, with Flipkart opening new venues in online grocery and food sale.
• Walmart is known for its supply chain management. Amazon was believed to enjoy a strong upperhand over Flipkart in this avenue. Come Walmart, everything changes. Amazon and Walmart both pioneers of supply chain pitting against each other makes things really interesting.
• Bigger the company more will be it’s impact on the market. So the profit and losses of the world’s largest comapny by revenue in the world’ second most populous country will have some decent impacts on the share market.
• Finally one negative point. With the current government being so vocal in its support for ‘Make in India’ and other such Swadeshi school of thoughts, such acquisitions may hamper the growth of local retailers, manufacturers and innovators but that’s just a prediction It could a growth also.

3. WHAT?

• It manages to procure at the lowest prices, its own expenses per unit of sale are low — helped no doubt by its size — and the logistics are amazing, all of which will help Indian consumers.

• Secondly, Indian farmers can hope to get better returns, with speedy transportation and there should be some savings by cutting out the long chain of middlemen.

• The projected rapid growth of the new version, going by their track record worldwide, should see a lot of direct and indirect job creation and the emergence of thousands of “service providers” — small and medium enterprises — to feed the big company. They will need myriad relationships; transporters, storage facilities, manufacturers, the entire value chain.

• Also, Indian consumers will get new product types, which otherwise were not available online before. Both brands will bring in global stocks and sellers to the local marketplace, giving more options to the buyer.

• Consumers will get better-managed deliveries given the increase in investment in supply chain and infrastructure. This will also translate to the availability of products in Kirana stores, which implies better pricing, quicker deliveries, and overall better service levels.

To conclude, the impact of Flipkart Walmart deal on Indian economy can only be predicted and the predictions are believed to be largely positive.

And talking about who won?

“So, As of now, whether it’s Investor, Founder or Consumer, Everyone wins, And if it’ll not happen, we’ll learn.” That’s the business, Welcome to corporate world. 🙂

Well, What interests me is the fact that two worldwide leaders of e-commerce are officially in India now and are ready to go hammer and tongs to expand their customer bases. It is time for the Indian Economy to reap the benefits of this healthy and profiting battle.

Signing off 🙂

Cheers 🙂

(Thanks to my friend Naion for asking these questions about Walmart-Flipkart deal, A food blogger and an aspiring manager, For more Check out his blog :- https://naionzwrites.wordpress.com/) 🙂