The Flip-Mart example

How you can’t stop the inevitable by diktat – only delay it

Updated - May 06, 2018 10:05 am IST

Published - May 06, 2018 12:02 am IST

By the time you read this, it is likely that one of the biggest deals in India’s retail space would have gone through. Walmart, the Bentonville, Arkansas-based retailing heavyweight — it has revenues of around $500 billion, operates in 28 countries and employs a staggering 2.3 million people worldwide — would have acquired a majority stake in Flipkart, India’s largest (around 57% market share) player in the e-commerce marketplace, with revenues of over $3 billion and more than 30,000 employees. Bingo! The world’s largest retailer would have folded in India’s largest e-tailer.

And there’s little the government can do about it.

Now this may come as a surprise to those whose memories extend back a decade or so, when Walmart first tried to step foot in India. India’s retail traders were up in arms. Millions of kirana stores — neighbourhood mom-and-pop grocery stores — would be put out of business, they argued. The Bharatiya Janata Party, then in opposition, backed the traders’ associations — many of whom formed part of its core support base – to the hilt. A stampeded UPA government eventually caved.

Initial recovery

Walmart’s retail plans fell apart and, instead, it opted to open wholesale cash-and-carry stores in India, in partnership with Sunil Bharti Mittal’s Bharti Enterprises. In 2014, Walmart India became a wholly-owned subsidiary of Walmart Inc, and now operates 20 stores and a fulfilment centre in India.

But that is a decade, and a regime change later. Back then, something like the Flipkart deal would have looked downright impossible. In fact, a promise to keep foreign-owned multi-brand retail out of India formed part of the BJP’s election manifesto back in 2014, so it should have been pretty nigh impossible now too, instead of looking like a done deal.

What changed? For one thing, the players have gotten smarter. Given all the barriers which the online retail sector also faced in India — ironically, on similar grounds to the opposition to brick-and-mortar big box retail — the key players are actually out of the Indian regulatory ambit. Amazon is wholly foreign owned. Snapdeal, the erstwhile number three before its meltdown, is mostly held by motley assortment of foreign investors like SoftBank and China’s Alibaba Group.

Flipkart may be the biggest player in Indian online retailing, but it is not actually an Indian company. It is registered in Singapore and is owned mostly by foreign investors, including U.S.-based hedge fund Tiger Global Management, Japan-based SoftBank, Chinese e-tailer Tencent and even tech giant Microsoft. Co-founders Sachin and Binny Bansal own only a little over 5% each in Flipkart. So, an offshore deal between foreign-owned Walmart and foreign-owned Flipkart cannot be stopped by a government fiat in India.

Walmart, too, has learnt its lessons well in India. After having been stymied in its traditional retail venture, it morphed into a B2B company in India. So well, in fact, that it is now rolling out the India model in other emerging markets. Also, its biggest customers in the wholesale stores are actually kirana shop owners – who find it more convenient and cheaper to source from a single point, rather than deal with the maze of stockists, wholesalers, distributors and redistributors, through which manufacturers of consumer products actually connect with the bottom end of the pyramid in India.

Everyone is happy

In fact, the Walmart India website declares on its homepage that “helping kirana and other small business owners succeed would be a must.” It has, in just under a decade, managed to convert its core opposition to its core support.

All of this leaves the government with not a little egg on its face. And hopefully, an important regulatory lesson to be learnt: that no amount of regulatory roadblocks can stop the market from an idea whose time has come. If you won’t let a business seeking an opportunity in through the front door, then it will eventually find a way in through the back door.

India has gained little by blocking foreign direct investment in retail. True, mom-and-pop stores still account for 90% of the retail market, but that is because of their inherent strengths and competitiveness, not policy. Remember, no restrictions of any kind apply on Indian-owned organised retail. And while that segment has been growing rapidly, it has not managed to displace the kirana stores — despite the backing of biggies like the Tatas, Birlas, the Ambanis. Remember too, that organised Indian retail has been around for nearly two decades now, so it is not as if the scenario will change dramatically any time soon.

Yes, the kirana store is under pressure, particularly due to growing urbanisation and rising overheads. But that trend will persist whether or not foreign stores are in the mix. Besides, they are fighting back. GST will actually help their margins because of input credits, while there are now technology solutions developed specifically for small retailers.

And they adapt at light speed. My neighbourhood retailer delivers on WhatsApp and delivers six eggs with the same alacrity as a ₹3,000 monthly grocery order. Neither Indian nor foreign biggies can match that.

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