Author(s): Raghu Gopal
In October 2007, Flipkart was launched as a simple Web site to sell books. The founders delivered orders to buyers, going door to door on two-wheelers. Like Amazon, Flipkart had a humble beginning, but grew to become a major influence in India's retail market.
Last week, Walmart acquired a 77 percent stake in Flipkart for about $16 billion. This is a major development that will further highlight the growth potential of e-commerce in India, which is becoming one of the most attractive retail markets in the world given its size. With Walmart's support, Flipkart can be expected to accelerate its vision of altering buying behaviour in the country. The deal will also encourage other merger and acquisition activity, drawing other online retail giants to India.
Flipkart is the e-commerce market leader in India with close to 40 percent share of the market. However, Amazon's entry in 2013 changed the landscape and delivered a major blow to Flipkart, reducing its customer total by offering faster delivery options, lower prices and additional features such as Prime streaming services. Since then, Flipkart has evaluated strategic partnerships including a potential merger with eBay in August 2017, and made a similar, yet unsuccessful attempt to merge with Snapdeal, another major local e-commerce company.
Amazon, which holds 44 percent share of the online retail market in the US, is engaged in a tough battle with Walmart for the US consumer. Now, Amazon and Walmart will be fierce competitors in India. It's a rivalry that's going global.
Flipkart will allow Walmart to jump-start its ambition of reaching Indian customers, and thus defend against Amazon's onslaught. By becoming a major player in India, Walmart will quickly gain a better understanding of emerging markets, an asset it hopes to use in other locations.
For Indian consumers, we expect the deal to broaden the product choice, with Walmart bringing in products from a multitude of suppliers worldwide. This was one of the effects of Amazon's launch in the country. At the time, the market was essentially limited to products carried by Flipkart, eBay and Snapdeal. Although Flipkart was the clear innovator in this space, Amazon was able to secure a second-mover advantage when it arrived with its huge selection of products.
The entry of Walmart creates a new sense of balance. In addition to funding for investments in infrastructure, the company has the logistics talent and a web of partners that Flipkart can now tap into. On the other side of the equation, Walmart will have access to Flipkart's portfolio of products from local businesses, which Walmart could carry in other markets. Walmart's supplier network has expanded.
We also believe that the agreement will have a significant impact on pricing in the market, with the potential for a drawn-out price-war. When Walmart faces off with Amazon in India, it's likely to wield its best weapon: low prices.
Indian customers are very price-conscious and familiar with the advantages that price-wars can create. For example, we're reminded of the virtual revolution that Reliance Jio started in the Indian telecommunication market. The price-cutting moves triggered by Jio offered Indian consumers one of the most affordable mobile data plans in the world. We can question the sustainability of such ruthless pricing strategies, but the operator has certainly changed expectations.
Like Jio, Walmart and Amazon have cash flows from other businesses and can, at least temporarily, subsidise their Indian operations. The deal will accelerate competition between these two giants and will trim already tight margins further. Amazon has seen significant operating losses in its international business since 2016, mostly as a result of its large investments in India. The two companies will make online retail more advantageous, persuading more Indians to shop online. The growth that the two companies are looking for will be a self-fulfilling prophecy, but a big question for Walmart is how much money it is prepared to sink into the adventure.
Flipkart, a company once often referred to as the "Amazon of India", is now the Amazon competitor of India.
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