The Walmart-Flipkart Deal and Its Implications for the eCommerce and Retail Sectors

The Promise and the Perils of the Walmart-Flipkart Deal

The recent announcement by the American retail behemoth, Walmart that it is acquiring a majority stake in the Indian eCommerce firm, Flipkart, was greeted with much applause as well as some apprehension from various quarters.

The applause was for the fact that by entering the Indian eCommerce sector, Walmart, was signaling its readiness to do business in India despite several failed attempts earlier mainly stymied due to the laws and regulations governing FDI or Foreign Direct Investment in Single Brand and Multi-brand retail.

The apprehension was that there would no space for local players in the eCommerce sector where Amazon is already a competitor. In addition, there were some who voiced fears about the impact that the deal would have on employment in the unorganized sector especially the Kirana and Mom and Pop stores that make up the bulk of the Indian retail sector.

Further, the fact that the two main players in the Indian eCommerce sector after the deal would be Amazon and Walmart sent many into a tizzy given that nationalistic and patriotic sentiments are running high at the moment.

Whatever be the joy or fears, the deal is as good as done and hence, we must now look at the implications of the deal on the sector as well as the overall economy.

The Implications of the Deal

To start with, the Walmart–Flipkart deal brings with it the much needed capital investment into the India economy which would boost the investment prospects by other players keen on investing in the country.

Apart from this, given that Walmart has deep pockets, it makes sense for it to stay the course until it makes profits without throwing in the towel midway. This is because all firms in the Indian eCommerce sector are sustaining losses for many years now as their business models based on heavy discounting mean that profits are a distant priority.

While this business model has its merits and demerits as we would discuss shortly, the fact remains that unless a firm is willing to stay put without giving up, no eCommerce entity would be able to survive the cutthroat pricing that is the norm.

This is what has been happening with both Amazon and Flipkart and going forward, we can expect Walmart to follow this strategy as well. I addition, the deal ensures that the Indian government might look favorably towards allowing multinationals into the Indian Retail sector which is a longstanding and long pending demand.

The Reactions of the Key Players

Indeed, many opposition parties were quick to point out that the present dispensation had opposed FDI in the Retail sector when they were in the opposition and its approval now smacks of hypocrisy.

This is the reason the Indian government has chosen to say mum on the deal and it is already sending feelers that it does not have anything to do with the deal. The point here is that the Indian retail sector is an important vote bank for any party given the large concentration of the Kirana stores, where the entry of big foreign players would put them out of business.

In addition, even the Indian eCommerce sector is based on the Glocal model where firms have to adapt to Indian conditions, thereby localizing their strategies, though they can have an overall global strategy.

In other words, both the eCommerce and Retail sectors in India depend on much purely local last mile connectivity for their success which is one of the reasons for Walmart to take the acquisition route instead of outright entry into the sector.

Heavy Discounted Business Model and the Longer Term

As mentioned earlier, the Indian eCommerce sector is characterized by heavy discounting where consumers are offered deals that are discounted by as much as 80% (on the extreme and around 50% on the average). This business model works only when the players can afford to lose money until they attain profitability.

Moreover, such profitability is also not assured even a few years down the line and this is the reason some experts are puzzled as to why any firm would like to keep making losses for years on end.

Having said that, it is not the case that the losses would be forever as we saw in the case of Flipkart that turned in some profits in recent years. Of course, the main driver for the investments in the Indian eCommerce sector is the promise of scaling up and attaining critical mass which would enable the firms to achieve profitability sooner or later.

Moreover, the incidence of cross subsidization where firms such as Amazon and Walmart sell some products cheaply and others expensively is another reason why they like to offer discounts on the former.

Perhaps the most important factor here is the longevity of the players who in a single voice often insist that they are in for the longer term and this is the reason they are willing to incur losses now.

Conclusion

Whatever be the motivations, the implications as discussed until now have to be kept in mind by all stakeholders when they study the Indian eCommerce and Retail sectors. It is our view that in the years to come, these sectors would witness more competition from foreign players either directly or indirectly and hence, it makes sense for them to strategize accordingly.

Lastly, the Indian eCommerce sector offers investors the salivating prospect of tapping a huge market that is estimated at around 500-600 Million Middle class consumers. This is the reason why all players, domestic or foreign are keen to have their fingers in the pie.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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