US multinational retail corporation Walmart’s decision to buy 77 percent of India’s largest online company Flipkart for US$16 billion, touted as the world’s largest ecommerce deal, has stirred things up in Asia’s third largest economy and provided a way around prohibitions on foreign investing in online retail.
Announcement of the transaction has raised objections among residual protectionists that it will do lasting damage to small shopkeepers. But they have been pushed aside as largely irrelevant.
Analysts forecast that the transaction will not only pit Walmart against arch-rival Amazon, but help it gain an edge over the online retail behemoth. over it. Walmart is now poised to achieve a commanding presence in India’s burgeoning ecommerce market, which is currently worth US$672 billion, and set to cross the US$1 trillion mark by 2020, according to industry lobby group Assocham.
Amazon currently has US$6 billion of gross merchandise value business in India. Flipkart controls 34 percent of India’s online sales, based on Euromonitor data, followed by Amazon with 27 percent. Online sales in the world’s second most-populous nation are galloping at about 35 percent a year, say experts, with a booming middle class estimated by Deutsche Bank Research at 300 million people in 2016, and rapid urbanization providing a fertile ecosystem for ecommerce.
Trade analysts are projecting the Walmart-Flipkart deal as a win-win for both companies. Per the arrangement, the bulk of the money involved, around US$14 billion of the US$16 billion, will go to existing investors with only about US$2 billion coming into the company. For Walmart, which currently operates 20 wholesale clubs in India that serve small businesses, the deal will allow it access into India’s exponentially growing retail market without spending on overheads like cold chain infrastructure.
Walmart has hitherto been unable to open traditional stores across India due to governmental rules for multi-brand international retailers which prohibit foreign investment in online retailing. Likewise, Flipkart will benefit from the capital infusion to take on Amazon minus the headache of worrying about a public share sale.
Flipkart was founded in 2007 by its two Indian but now estranged partners Sachin Bansal and Binny Bansal, both former employees of Amazon. Flipkart’s current Group CEO Binny Bansal said he saw great synergies in the two companies and that the deal was a “watershed movement for start-up businesses”, helping bring global focus on India.
Doug McMillon, Walmart’s president and CEO, quickly assuaged Indian fears about the takeover, and the possibility that his company will decimate local mom-and-pop stores that form the core of the Indian retail landscape. He repeated that the deal would generate millions of jobs while bolstering the economy through local sourcing of goods.
“India is the largest and fastest growing economy in the world,” McMillon said. “With this deal, we’re making a long-term investment in India’s future. We are moving this to sustain India’s economic growth. Jobs will be created. We will invest in local communities… India is a priority market for Walmart”
Market analysts dismiss fears of obliteration of small local groceries.
“Organized offline retail accounts for a tiny 6 percent of Indian retail,” said Sanjiv Raghuvanshi, Chief Manager, Reliance Retail. “Far from erasing small players, brick and mortar shops are costs of large overheads as well as well as consumers’ increasing preference for street corner shops, particularly with respect to buying groceries, India’s retail sector accounts for 8 percent of all employment, and contrary to fears, the livelihoods here certainly have not been impacted over the last decade.”
Some experts also view the Walmart-Flipkart deal as a ringing endorsement for the Indian startup story.
“It will rejuvenate the country’s startup ecosystem and encourage global companies to invest locally,” Tarun Davda, managing director at venture capital fund Matrix Partners India told The Times of India. Over the last 12 months, Alibaba, Tencent, Naspers, and now Walmart have taken meaningful positions in several Indian startups.”
Investors feel that once the euphoria subsides, it should lead to navel-gazing on the part of the government and internet companies about India’s internet ecosystem. “This is a big wake-up call for large Indian corporate houses and Indian businessmen who had little faith in the Indian ecommerce ecosystem while foreigners saw value in it,” said Ravi Bhatia, a local trader.
As expected, the deal has also invited comments from conservative right-wing groups including some affiliated with the current government. Swadeshi Jagran Manch alleged that Walmart is “circumventing” rules for a “back-door entry” into India and seeks Prime Minister Modi’s intervention to safeguard the national interest.
“This will further eliminate small and medium businesses, small shops, and opportunity to create more jobs. Most of these small entrepreneurs are already battling for their existence; entry of Walmart will further create problems for them,” said a senior official of the organisation.
Ashwani Mahajan, national co-convenor of the economic wing of RSS said that allowing Walmart to establish its business in India will lead to an increase in the sale of Chinese goods. “In such a scenario, what will happen to the initiative of Make In India?” he said referring to Modi’s flagship program that aims to make India a manufacturing hub.
Also interesting to watch, say analysts, will be how the ruling right-wing BJP reacts to the prospect of India’s e-commerce market being in the hands of “foreign” players in an election year. Hopefully, they add, it should force the government to review its FDI policy which currently doesn’t permit foreign investment in multi-brand retail. Another niggling question is: Will multinational retail chains be allowed henceforth to acquire majority stakes in other Indian e-commerce companies?
Most people are in favor of increasing foreign participation. Raghuvanshi of Reliance feels protectionism is never a good idea for a growing economy. “Consumers and investors are best served when there’s healthy competition in the marketplace for supply and demand of goods and services. So the government should create an enabling environment for fair competition rather than clamp down restrictions on foreign players,” he said.
Further, with troubled US-China relations, American and western companies will increasingly be training their eyes on India for growth and opportunity. After all, the world’s second most populous country, with 1.3 billion people, half under the age of 25, offers them a lucrative market. It is now up to the Indian government to leverage this interest to attract foreign investments and bolster the economy.