A detailed analysis of Flipkart – Walmart Deal

We all know and agree to one thing that flipkart is the leading e-commerce portal in India followed by Amazon India. Recently there was a deal between flipkart and Walmart which happened to be the biggest eCommerce deal in Indian history in fact world’s largest eCommerce deal.

Below is the market share of top 4 players in e-commerce – within 10 years of operations Flipkart managed to acquire 40% of the market share in simple words 4 out of 10 consumers shop on Flipkart online.

Capture

What is Walmart?

Walmart is a top MNC (ranked 1st according to fortune 500 2016) based out of USA. It has a chain of hypermarkets operating in 28 countries with approximately 11700 offline stores. Currently there are 21 stores in India operating under the brand Best price.

Walmart took over 77% stake in flipkart for a whopping amount of $16 billion. Before talking about the deal let’s see what grabbed Walmart’s attention to spend $16bn on flipkart.

Why has Walmart invested $16bn in flipkart?

Amazon global is a leading e-commerce portal and Walmart wants to compete against it online and in fact wants to stay ahead of Amazon, hence it considered few points before taking this decision.

Firstly, India is the only place Walmart could look at to fulfill its dream after China because the scope of development in India is more than any country for its size and growth rate.

Prior to this (flipkart acquisition) Walmart has already tried to enter eCommerce once in past by acquiring Yihaodian a Chinese online grocery marketplace in 2011 which did not work for them, hence they sold it to Alibaba’s rival JD.com in 2016.

Post the transaction discussed above in the same year Walmart acquired Jet.com one of the fastest growing e-commerce companies in USA for $3 billion in cash, attempting to compete with Amazon for a larger share in the e-commerce market.

When Walmart couldn’t compete against Alibaba in China Amazon in USA they moved their eyes to India where Flipkart is the leading eCommerce portal which was valued at approx. $11.6bn before Walmart took the majority stake.

Secondly, the customer base for Flipkart is more than Amazon India and Flipkart is growing rapidly every year and for fiscal year ending 2018, the annual GMV (gross merchandise volume) was $7.5 billion, representing 50% year-on-year (yoy) growth.

Thirdly, Bansals’ approach towards innovation, scope of development and management skills has impressed Mc Millan (President and CEO of Walmart) to think further on the acquisition – though Flipkart is nowhere close to profits.

Not only for the above points but there many others it considered to take this burly decision.

After Walmart’s investment, Flipkart is valued at around $20.8bn which is now worth more than the combined market cap of listed entities of Avenue Supermarts Ltd, Trent Ltd and Future Retail Ltd.

This clearly indicates Walmart’s urge to compete against amazon trying to be the first in online and offline FMCG market worldwide.

Flipkart’s benefit

Firstly, apart from the investment Flipkart received $2bn additionally for it’s vision to accelerate growth directly benefiting its customers.

Secondly, according to Flipkart, its own supply chain arm eKart serves approximately more than 800 cities, delivering 5 lakh products in an average daily.

With this deal, Walmart will bring in grocery and merchandise supply-chain knowledge and financial strength, and Flipkart will make the most of the merger to grow into a listable (part of the vision) giant quickly.

Below chart represents the flipkart shareholders until Walmart’s acquisition of 77% stake.

Why did Sachin Bansal exit Flipkart?

Sachin Bansal, the group chairman of Flipkart and CEO until 2016 (taken over by Kalyan Krishnamurthy) exited by selling his 5.5% stake for $1bn.

Sachin was keen on buying more shares and not sell his stake, but he had to quit not by choice but by requirement. Yes, Mc Millan wanted only one of the co-founders to be the part of the board and they chose Binny over Sachin as they have seen a good rapport between current CEO Kalyan and Binny.

Possible effects

  • Kill online sellers on Flipkart – Walmart is known for its pricing. With its ultra-low prices online sellers might be wiped of as they cannot compete with Walmart.
  • Walmart’s own brand – Walmart might bring many products with its own brand just the way it is operating in other countries. These products could be brought at hyper competitive prices making it difficult for others to compete.
  • Agricultural benefits – Now both Flipkart and Amazon would fight for leadership in the market which will benefit both farmers and consumers. India’s total consumption over all is expected to rise by three times in next 10 years according to industry data. The biggest sector is expected to be food and grocery, which will drive a separate and similarly substantial investment by Walmart in agriculture. Walmart has more than five decades of experience in FMCG which will revolutionise Indian retail sector with low prices and a vast variety of consumer goods. Amazon’s fight-back to retain its position will ensure that prices remain competitive.

Conclusionuk-1106-534502-front.jpg

Flipkart with it’s efficient logistics and Walmart with it’s huge investment can offer consumers – products with an incomparable price, suppliers – a very good opportunity for growth, farmers – with better returns for their crops and mainly it creates many more job opportunities when Walmart start expanding their operations India wide.

Currency considered USD

If you have any questions or feedback then do let me know in the comments below!

Author: Shyam Chegu

An aspiring financial analyst, pursuing MBA in finance at CMS business school, worked as an analyst for Moody's analytics, practical learner and a traveler.

4 Thoughts

  1. Good one shyam. Very informative.
    Also why don’t you write about sectors as a whole ?
    Say Banking, Hospitals, FMCG etc and throw some light on that particular industry. Like how you explained in short about e-commerce in this blog.

    Thanks in advance.

  2. Very informative shyam.
    Walmart has tapped the right button. India being one of largest consumption economy in the world with a population of 1.3billion and the economy growing at a faster rate makes this deal an attractive one.
    Walmart would certainly gain a larger pie.

    1. Exactly and e-commerce will be interesting the next decade atleast..
      And Flipkart is trying to list a part of its shares and may be investing in Flipkart can generate good revenue….

Leave a Reply

Your email address will not be published. Required fields are marked *