U.S. retail giant Walmart’s acquisition of Flipkart will not only bring global expertise to the retail industry and grow the e-commerce market but also improve investor sentiment about exits from Indian market, said Satish Meena, senior forecast analyst at research and advisory firm Forrester Research. But, in a separate interview,K. Vaitheeswaran, who founded India’s first e-commerce firm — Fabmart.com — said that the Walmart-Flipkart deal does not make any sense as retailer is doing the acquisition at $20 billion-valuation to fight for less than 1% of the retail market in India. Edited excerpts:
If the Walmart-Flipkart deal goes through, what impact will it have?
Meena: For the online retail market in India, it is good because it will bring [in] not only the money but a lot of expertise in the retail domain. And, ultimately, the customers are going to get the benefit.
The [online retail] market is small right now...around $20 billion and it is really important we have at least two or three big players [Amazon, Walmart, Alibaba]... to grow this. For Walmart, this [deal] is something that they have been looking at for 20 years to get access to the Indian retail market, but our regulations didn’t allow them to enter and open stores. They did open the wholesale stores with Bharti [Enterprises] but that experiment was not very good and they skipped that venture. Now, they [Walmart] are facing the heat from Amazon in the U.S market. They don’t want to repeat the mistake they did in the U.S where they gave Amazon a lot of time to get access to the customer wallets.
They don’t want to give Amazon more time here in India and then play catch up [game] four years later. They are paying the premium because Flipkart is now the only player on which they can place the bet. It is really important for them to have this market.
Vaitheeswaran: The deal is good for the ecosystem as it will open up the fact that yes, it is possible to get good decent exits out of India as well and hopefully encourage more investors to continue investing in the Indian start-up ecosystem. But from the Walmart point of view, I’m not sure the deal makes sense.
After 30 years the e-commerce [market] in America is less than 10% of the retail. In India, it’s less than 1%. Walmart is investing $20 billion, whatever that crazy amount is, so that they can come and fight for that less than 1% of the retail market which does not make commercial sense, it is ridiculous! It is not that they would come and capture this 1% because Amazon has already taken a large percentage. If they’re really good at what they do, they will get 25% of less than 1% of the Indian [online] retail the market. Flipkart has proved it over the last five years despite spending $3 billion-$5 billion in India... they have steadily seen their market share erode and they know the writing is on the wall that Amazon, if not already ahead, would quickly get ahead. FDI is going to be a big issue [for Walmart]. I think you would expect a lot of regulatory interest and attention on this. They can’t acquire Flipkart and start opening the stores.
Will it make sense if Amazon acquires Flipkart?
Meena: The logic is that they remove Walmart out of the picture. If they acquire Flipkart then there is no other entity left which Walmart can bet on and which can be a competition to Amazon. But the price is very big… the valuation is almost $19 billion- $20 billion, which is something Amazon might not be ready to pay... But you never know. SoftBank [Flipkart investor] is still not very clear, they might be still looking for a better price from Walmart that is why they are still playing the Amazon card. It may be a negotiation tool by the investors for a better exit.
Vaitheeswaran: They (Walmart) already have great Walmart.com technology which they run in the U.S. They move it here and hire people and in 24 months they have a great selection going and they put that $5 billion and compete with Amazon and Alibaba. They may never become number one in the Indian e-commerce market but they could have become a very strong player at one-third of the investment. It is not as if time is running out and they have to do the deal otherwise they would lose.
Amazon would have never bought Flipkart because Amazon knows that there are FDI issues that would happen.
Why is Flipkart being valued at $20 billion?
Meena: Amazon was very close to taking over Flipkart but two things stand out which stopped the decline of the market share for Flipkart. One is that they still own almost 40% of the smartphone category...second is that fashion [category] still remains almost 60% market share for Flipkart [and its units] Jabong and Myntra. Amazon is still not big in fashion. These are the two things which gave Flipkart a kind of breathing space last year, though the gap between smartphone category is narrowing down, the fashion is still 55% versus 17%. It (valuation) is also a requirement for Walmart to invest and get access to the Indian market.
Flipkart is the only player which can give them that kind of entry and scale at the same point in time. They are not investing in the current performance of the company (Flipkart) but they are looking at the future addressable market which India provides in the next 15 years.
Vaitheeswaran: Somebody must have gone and told Walmart that If you don’t do the deal in India in e-commerce, the doors will be closed and no future player would be allowed. They must have panicked. I think somebody has done a clever valuation discussion with Walmart. I don’t think that makes any sense, nothing has changed.
If you look at Amazon versus Flipkart, competitive performance over the last 12 months or any [other metric], I would assume the Flipkart valuation to go down, because Amazon is not only closing the gap but is already ahead. I don’t think this (valuation is justified).
If this deal gets closed at $20 billion-valuation, would you consider Flipkart as a success story?
Meena: Flipkart is a success story for the Indian e-commerce market. This is a company which taught customers how to purchase online. It is a success story already whether the valuation is $20 billion or $15 billion, it doesn’t matter.
You can’t compare it to Uber or Airbnb [valuations], their addressable market is much bigger.
Vaitheeswaran: A company that spends $5 billion-$6 billion [and] after 10 years is not able to make profits is not a success story. Of course, it depends on what you mean by ‘success.’ If the metric of success is that have they raised a large amount of money, have they increased paper valuation, of course, they have succeeded. My metric for success always is that a start-up must be able to create a business that is sustainable. It (Flipkart) is India’s largest loss-making company, how can that be a success?
