Why Flipkart and Walmart need each other to keep Amazon at arm's length
Everyone has been hearing it through the grapevine. Now, it appears that US retail giant Walmart is on the verge of buying either a majority or significant minority stake in Indian e-commerce major Flipkart.
The Economic Times reported on Wednesday that the Bentonville-based Walmart is in the final stage of talks to become the largest shareholder in Bengaluru-based Flipkart. According to the report, Walmart may buy around 20-26% stake initially before increasing its shareholding to 51% in the future.
Separately, The Times of India reported that Japanese investment behemoth SoftBank, which is Flipkart's largest shareholder, would shed part of its stake and that Walmart would invest up to $10 billion.
Walmart declined to comment, while Flipkart and SoftBank told TechCircle that they do not comment on speculation.
Assuming a deal does go through, what does the world's largest company by revenue stand to gain by becoming a strategic investor in the country's most valued e-commerce firm? And what will it mean for Flipkart?
In 2007, Indian Institute of Technology (IIT) graduates Sachin Bansal and Binny Bansal started an online bookstore along the lines of what Jeff Bezos had done with Amazon in the US.
Cut to 2018 and both Flipkart and Amazon have long outgrown books to become e-commerce giants in their own right. For Flipkart, it's now all about maintaining its dominance in India even as Amazon goes all out to catch up in the country.
Last year, Flipkart raised $2.5 billion from SoftBank. Now, Walmart has come calling with reportedly an even bigger proposal.
Mohan Kumar, executive director of Norwest Venture Partners, thinks it would be a perfect match.
"This [Walmart] is probably the biggest investor left to fund Flipkart. There was no other possible exit scenario for Flipkart investors and Walmart does not need an exit and hence it is convenient for all of the players," he said.
Kumar believes that Flipkart's existing backers Naspers and Tiger Global will do everything possible to ensure that Walmart enters the fray.
"The price looks expensive but if Walmart is desperate for a retail pie in India, Flipkart is in a position to exploit that," said Satish Meena, analyst at Forrester Research, a market research firm.
Industry experts say Flipkart does not have any cash flow problems. But then again, Walmart's investment is not about money.
Being the world's largest brick-and-mortar retailer, it has a strong supply chain network, a large number of direct sellers and a vast distribution network.
Walmart has been trying to gain a foothold in the Indian retail market for quite some time now. A retail partnership with Bharti Enterprises turned sour in 2014 and India is not exactly welcoming foreign players in offline retail.
Given the current climate, online seems to be Walmart's best option. It's an avenue that Walmart has explored in the US as well with the acquisition of e-commerce platform Jet.com for more than $3 billion in 2016. It even changed its legal name from Wal-Mart Stores, Inc. to Walmart Inc. late last year to appear more online-friendly.
However, Walmart is still feeling its way in the online retail space with relevant technology and know-how not yet its strong points. And that is why acquiring a stake in Flipkart could make sense and is a more attractive option than backing Snapdeal or ShopClues. Walmart needs a well-run company with a well-oiled tech machinery.
Simply put, Flipkart has what Walmart needs and vice-versa.
“(For Walmart) It makes sense to acquire an online player rather than an offline retail company," said Anup Jain, managing director of retail consulting firm Redback Advisory Services. "And the best buy in India is still Flipkart. You have to act now or be ready to pay a higher amount.”
SoftBank has invested lavishly in India with Flipkart, ride-hailing firm Ola and digital wallet company Paytm among its most prominent bets.
SoftBank chairman Masayoshi Son sounded quite pleased about these investments while addressing investors last year.
“Flipkart [is] India’s number one e-tailer has 60% in the domestic e-commerce market and is bigger than Amazon India. It is very difficult to see someone who is bigger than Amazon,” he said.
This begs the question: Why would Son relinquish control so soon?
“"While SoftBank does not want an exit so soon, it is too attractive to let go so early after investing,” said Meena.
Redback's Jain said that for Flipkart's other backers like Naspers and Tiger Global, getting a strategic partner may be a decent option. As for Flipkart, a public listing is still a long way off and a risky proposition given that profitability is still a distant dream, he added.
Amazon has been making heavy investments in India over the past couple of a years, including more than $750 million in the last six months alone - a clear indication that it means business.
If Walmart invests in India, it would mean a battle with Amazon on two fronts. In the US, Amazon acquired supermarkets chain Whole Foods last year for more than $13 billion in a bid to catch up with Walmart. In turn, Walmart has been increasing its online play with steps like expanding its home delivery services.
"At some level, it also makes sense to battle out Amazon in multiple markets," said Jain. “A successful Amazon in India will make the US fight tougher for Walmart and here you have several allies in the form of eBay, Microsoft, Tencent and SoftBank.”
All indications are that Walmart should strike while the iron is hot. But will it be enough for Flipkart to stay ahead of Amazon?
“It is difficult to predict whether it will be enough as Walmart is struggling to take on Amazon in the US,” said Forrester's Meena. "They can prevent Amazon's market share gains for some time though."