Online Seems to be The Only Way Forward
Flipmart – Walmart Flipkart Deal – Walmart’s agreement to buy a controlling 77% stake in Flipkart, the leading shopping site in India with a market share of 55% is an ambitious move in the Indian e -commerce industry. Walmart has purchased Flipkart for $ 16 billion when it has global revenues of $ 500 billion. This appears to be a small piece to pay for a 55% market share in a fast growing online retail market. This purchase gives Walmart a running start in the Indian e commerce and it also has strong financial muscle to compete with the deep pocketed rival Amazon.
An investment worth $16 billion for a 77% stake values flipkart at $21 billion against $10.5 billion a year ago. Now the entire domestic online retail market is valued at about $19 billion. Hence, Walmart paid a premium to acquire Flipkart which makes it a winning proposition for Flipkart too.
Questions were raised on the rationale behind acquiring a huge loss making unit which could not make profit in its 11 years of operations. With this thought, Walmart’s investors reacted negatively wiping away $10 billion worth of the company’s market capitalization in early morning trade on the NYSE.
Walmart’s stock reply to all of these questions was that it had thought really hard about the investment, especially knowing investors’ short-term expectations on cash flows and returns. Even so, it felt that the long-term opportunity in a country with a population of 1.3 billion was too large to ignore..
What Walmart didn’t say is that the acquisition would also help it build a foundation in India, which will help when it plans a larger play in the country’s offline retail market, whenever it is allowed to do so.
Besides, Walmart was evidently impressed with Flipkart’s product portfolio, ranging from an e-commerce marketplace, to fashion retail, logistics and payments services. Perhaps paying a $16 billion is not too high a price to get a strong market share in market which expected to reach $1.3 trillion in the next 5 years.
With this transition, Indian retail players cannot but take note. They should note that the greatest retail operator in the world, Walmart, has realized that online is where the future of businesses lies. Propelled by rising smartphone penetration, the launch of 4G networks and increasing consumer wealth, the Indian e-commerce market is expected to grow vehemently in the near future. It is increasingly attracting customers from Tier 2 and 3 cities, where people have limited access to brands but have high aspirations.
In 2017, online retail grew to $17.8 billion in gross merchandise value (GMV) from $14.5 billion last year, a 23 per cent increase. According to some reports, the India e commerce market in India is projected to grow by 60% in 2018. All these factors make Indian e commerce market a very attractive market and conforms our opinion that online seems to be the place where the world retail is headed towards.
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