10 Questions on Walmart's $16B investment in Flipkart

Walmart is paying $16 Billion for a 77% stake in Flipkart. The deal raises many questions regarding Walmart’s plans in India, competition with Amazon, and implications for the overall startup/tech ecosystem in India. After having responded to multiple media inquiries on the subject, I decided to consolidate my thoughts on the deal as an FAQ.

Why did Walmart give Flipkart such a high valuation?

It is overvaluing Flipkart. That’s the result of a bidding war between Amazon and Walmart. Walmart didn’t want to lose the deal. All I can say is it’s great for the investors and good job by Flipkart’s board and investment bank.

How will the deal affect consumers?

I expect that discounts and promotions that consumers have become used to will continue. Further, Walmart is likely to introduce many of its private label products to Flipkart. So, consumers will get access to new products. Walmart also brings it know-how to India and it’ll help Flipkart become more efficient. In turn, that will further help improve service and pricing.

How will the Walmart acquisition affect Flipkart culture?

When eBay acquired EachNet, the original leader in Chinese ecommerce, it imposed its culture on EachNet and also asked EachNet to drops its China product and switch to the eBay US platform. eBay believed that they had a superior product in the US. eBay soon lost the China market to AliBaba. This has been a well-known lesson for US companies that believe that company culture or product design can be dictated from here. I think Walmart will let Flipkart’s product and tech teams remain independent, at least for the next several years.

While Walmart will be eager to share its know-how and processes with Flipkart, I think it’ll be a mistake for Walmart to impose its culture on Flipkart. Walmart has tested the waters in India previously and other Asian markets and it recognizes that these markets are different in many ways. If company culture is being dictated from the US, the Flipkart deal will fail. I am sure Walmart knows that. That said, things like compensation and payroll expense are likely to get some supervision from Walmart but they will also be cognizant of the need for pay to be competitive with that of Amazon.

What is Walmart’s plan in India and what is it likely to do through Flipkart?

Walmart has been interested in India for over a decade now. Its previous partnership with Bharti failed. Flipkart will be a better partner for Walmart because Flipkart has an ownership structure and a corporate culture that will suit Walmart better than Bharti. Flipkart deal will give it access to consumers, a massive logistics network and the platform on which to eventually launch the omni-channel business.

Under VCs, Flipkart had far greater pressure to show market share and revenue growth. For Walmart, the strategic focus will be slightly different. I suspect where Walmart might leverage Flipkart will be in introducing some of its private label brands to Indian consumers through Flipkart and also in opening offline stores using the Flipkart brand.

How has the Walmart vs Amazon battle being playing out in the US?

In the US, Walmart is the only formidable competitor left for Amazon. Walmart has been growing its ecommerce operations and also aggressively acquiring e-commerce assets. Walmart paid over $3B for Jet.com, an ecommerce firm trying to compete with Amazon. And has made many other ecommerce acquisitions including Shoebuy, Modcloth and Bonobos. At the same time, Amazon has been increasing its physical footprint through Amazon lockers, opening of physical stores. And Amazon bought grocery chain Whole Foods for over $13B.

It’s natural for that battle to spill into international turf as well. And in fact, it has spilled over to markets such as China well before it did to India.

How has Walmart fared in China? What does its China experience say about the Flipkart acquisition?

Walmart entered China as far back as 1996. It opened multiple physical stores. In e-commerce, it first invested in Yihaodian in 2011 and eventually bought it. More recently, Walmart sold Yihaodian to JD.com and has invested in JD. Through that partnership, Walmart gains access to JD’s customers and JD gains access to products imported from Walmart and Sam’s club. I suspect we might see something similar with Flipkart and Walmart.

While JD.com is behind AliBaba in market share, the good news for Walmart is that JD has climbed up from less than 20% market share in 2014 to nearly a third of China’s ecommerce market. With Flipkart, Walmart is directly getting access to 35% of India’s e-commerce market on day 01. It’s a good start in terms of market share. The flip side is India’s e-commerce market is very small compared to China. So it will take a long time before Flipkart proves to be as important to Walmart as its China operations have proven.

What is the long-term prognosis for e-commerce in India?

The underlying factors are mostly very favorable for e-commerce. The cost of real estate space in urban centers leads to smaller, cramped stores that are unable to offer the wider assortment available in online stores. In addition, the inconvenience of urban transportation is another factor in favor of e-commerce. In rural areas or small towns, people are exposed to all the products on TV but many of them are often not carried in local stores. That again favors e-commerce.

The one challenge I is that logistics in India can be expensive due to the infrastructure. This cost, combined with consumer expectations of lower price online, makes it challenging to be profitable unless you have a super-efficient operation. Walmart can hopefully bring its know-how to Flipkart and help with that.

Should we feel sad that we no longer have a dominant Indian player in India’s e-commerce?

Before the acquisition, Flipkart was owned mostly by foreign investors like Softbank and Tiger Global. It was operated by Indian managers. That structure remains similar after this deal. So, logically speaking, the ownership structure or management structure hasn’t changed much due to this deal. So, there is no reason for us to get teary eyed.

What we could perhaps regret is that there was no Indian corporate in the running for such a large acquisition. Indian corporates have generally been very conservative when it comes to investing in or acquiring the newer breed of companies. In general, they don’t value tech or tech-enabled companies high enough and that means that the new crop of Indian companies are mostly foreign owned. Indian corporates should get more aggressive in investing in and partnering with the newer Indian companies.

Should the government have intervened to give homegrown companies an advantage over global players? Chinese government has been credited to have better protected its homegrown companies?

I don’t think the government should have changed laws in any manner to offer protection to homegrown players. First of all, as I said earlier, homegrown players like Flipkart and Ola are mostly owned by foreign investors. Secondly, offering too much protection removes incentives to innovate. Competition from Amazon forced Flipkart to raise its game. Ultimately, consumers will win when that happens. And as Indian companies learn to compete against global players in India, they will ultimately learn how to take their products and services to other companies as Ola is starting to do in Australia. This will create a new breed of Indian-headquartered multinationals. So, Indian companies will also win eventually.

Flipkart ultimately wasn’t able to take on Amazon on its own. In light of the deal, can homegrown startups compete against global players?

Yes. And there are many examples like MakemyTrip which has successfully taken on Expedia. At the end of the day, companies like Amazon are exceptions. They are a formidable and highly innovative rival with lots of cash and significant global experience. It’s understandable if Indian companies struggle to outcompete a firm like Amazon. But I don’t think we can generalize from this case. Also, let’s not forget that Flipkart has not been completely outcompeted. It has managed to stay in the race and has even established dominance in some key markets like fashion (through Myntra).