India, the third-largest potential retail hub, is set to become the next front of the competition between Wal-Mart and Amazon. In a bid to compete with Amazon, Wal-Mart is rumored to be making plans to invest up to $1 billion in Flipkart Online Services Pvt, the largest online retailer in the country. As expected, questions are looming about whether the deal will be sufficient to battle the world’s leading online retailer, which has already committed $5 billion in India.
Before we go any further, it is important to note that Indian startups like Flipkart have been had a rough time raising money in the last couple of months, owing to investors tightening their bank accounts. Here is an evaluation of the deal between Wal-Mart and Flipkart and a verdict on whether it would be profitable for Wal-Mart’s e-commerce business.
A Brief Overview of Flipkart Online Services Pvt
Flipkart is currently the largest online retailer in India with its current valuation standing at about $16 billion. It was founded in 2007 by Binny Bansal and Sachin Bansal, both of whom are former employees of Amazon. Its headquarters are in Bangalore, Karnataka, India. Since its launch in 2007, Flipkart has grown to include a wide range of products. It also has a product line under the label DigiFlip.
This product range consists of a wide range of items from different categories, most noticeably electronics and fashion. It had planned for a big sale in 2014, which failed and dealt a big blow to the investors’ confidence in the company. Since its foundation, Flipkart has made several acquisitions that have increased its stability in the Indian market. Some of the companies under its umbrella include Mime360, Myntra, and Appiterate.
Its most recent investment was in MapmyIndia, a Navigation and Route Optimization company. This deal is expected to improve service delivery as the company plans to use the logistics to ensure accurate and faster deliveries.
Flipkart is currently facing major competition from Amazon, which has taken keen interest in the Indian market. Additionally, its traditional investment sources have been dwindling owing to uncertainties about its valuation. Although Bloomberg pegs Flipkart’s value at $16 billion, there are reports that Morgan Stanley lowered this figure to about $9 billion. If this figure is correct, then this may further lower the investors’ confidence and give Amazon the chance it needs to set a strong foot in the market.
Prospects of the Wal-Mart Deal with Flipkart
The rumored deal between Wal-Mart and Flipkart would be a welcome opportunity for the latter to stay in the game as it is pitted against the largest and most experienced global online retailer. With its traditional investment sources dwindling, an investment of $1 billion would not only help it expand its operations, but also instill more confidence in local investors. However, Flipkart stands to benefits in more ways than just financially.
Wal-Mart is one of Amazon’s greatest competitors, and over the years it has learnt how to counter the latter’s marketing campaigns. With a $1 billion investment in Flipkart, Wal-Mart would be keen on helping the deal bear fruits, which would necessitate sharing of online marketing expertise. Hence, Flipkart would also get a better understanding of how to service its customers’ needs to gain a stronger base in the fast-growing market. Considering that it is at a disadvantage against Amazon in terms of capital, the expertise would be a major boost to Flipkart’s long-term prospects in the Indian market.
What Does Wal-Mart Stand to Gain?
Regardless of whether Wal-Mart and Flipkart eventually outdo Amazon in India, there is no question about the profitable opportunities that abound for Wal-Mart. In some sense, Wal-Mart may even need this deal to grow and stay in the game.
According to Dr. Annibal Sodero, a professor at the University of Arkansas, Wal-Mart may not survive by concentrating all its efforts on the U.S. market alone. The giant retail store has been facing stiff competition from the likes of Amazon, and this has lowered its sales. Hence, like most other multinational corporations,
Wal-Mart’s relief is seen in ventures into foreign markets and acquisitions with the leading companies in those markets. Considering that India is the third-largest potential online retail market after the U.S. and China, Wal-Mart may very well need to make this deal before Amazon gets a firmer grip in the market. Ideally, this would be the right time to for Wal-Mart to compete with Amazon on an equal playground. Although the future of Wal-Mart may lie in foreign markets, it would be nonetheless difficult to expand considering the high cost of capital. As was the case in China when Wal-Mart partnered with JD to compete against Alibaba, this partnership with Flipkart is expected to open the way for Wal-Mart to the Indian market.
Amazon has proven to be a strong force to contend with considering the large capital it has set aside for its venture into the Indian market. Currently, Amazon’s CEO Jeff Bezos pledged to invest another 3 billion dollars in the company’s Indian branch, which will bring up the total investment to 5 billion dollars. Wal-Mart would need to make an equally sizeable investment into the venture in addition to starting the process of studying the market from scratch. Whoever manages to take the upper hand in the competition, there is no doubt that the partnership between the two companies will be profitable for Wal-Mart. India is a very lucrative market, with a significant potential for capital income.
Although Wal-Mart officials have not admitted the rumors, citing matters of privacy, they have also not refuted them. If the rumors are indeed true, then the proposed partnership between Wal-Mart and Flipkart will have great benefits for both companies. Wal-Mart stands to gain an extra market in which to further its growth, as has been the trend with multinational companies. Flipkart, on the other hand, stands to gain a lot from the immense experience of Wal-Mart when it comes to online retailing.
To some extent, it is true that Wal-Mart needs to make this deal, and there was no better company to make it than with Flipkart. Competition will certainly be stiff, but all players, including Amazon, stand to reap huge profits in the long run.
Written by Garrett Parker
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