Podcast | Bentonville meets Bangalore: The Flipkart-Walmart deal

Posted May 11, 2018

Wal-Mart will take over Flipkart very soon.

The $16 billion controlling stake, announced Wednesday, is the largest acquisition yet by the world's largest retailer. Now the story changes though, from an Indian and American firm fighting it out, to India being the new battleground for the Walmart vs Amazon contest. The company has made a decision to acquire a majority stake in Flipkart for $16 billion. The jobs, he said, would be created not just in the company but with the suppliers who sell their products on the Flipkart platform. "This merger. reiterates our conviction of boom in domestic organized retail sector, which is estimated to catapult to $115 billion by FY20 from $55 billion in FY16, higher than 20% compound annual growth rate (CAGR)", it said in a 9 May note.

Flipkart sells consumer goods ranging from soaps to smartphones and clothes, and gives Walmart access to an e-commerce market that could be worth $200 billion a year within a decade, according to Morgan Stanley.

Flipkart is, in some ways, an echo of Amazon. The online retail platform was founded in 2007 by two former Amazon.com Inc. employees, Sachin Bansal and Bansal. Walmart is also looking to consolidate its India operations in Bengaluru where Flipkart is now based. It now allows for a variety of payments, from credit cards to gift cards to direct bank transfers. Along with its fashion arms, Flipkart has a market share of 40% of the Indian online retain market, which is now valued at $200 billion.

Worldwide business contributed less than a quarter to the retailer's total revenue of $500 billion (roughly Rs. 33.6 lakh crores) in fiscal 2018. Ahead of Wednesday's announcement about the deal, the tax department is learnt to have sent a communication to both Flipkart and Bentonville-based Walmart, apprising them about sections of the Income-Tax Act that would apply to the transaction since Flipkart derives "substantial value" of its shares from assets held in India and would be liable for taxation here.

The USD 16 billion (Rs 1.05 lakh crore) Walmart-Flipkart deal will have a positive impact on India's foreign investment inflows, NITI Aayog Vice Chairman Rajiv Kumar said on Thursday.

The rest of Flipkart will be owned by existing investors, including co-founder Binny Bansal, the Chinese tech giant Tencent, Tiger Global and Microsoft.

With the Walmart deal, however Sachin Bansal stands to attain his billionaire status again, as he will offload his entire 5.5% stake in the company to Walmart, earning him about $1 billion, Bloomberg reported.

The deal hasn't gone down well with the tens of millions of small store owners who for years used political muscle to slow the arrival of global retailers. The group says it represents 60 million businesses.

Irrespective of which e-tailer ultimately comes out on top in India, the more important topic relates to the future role of air freight when it comes to domestic and cross-border e-commerce supply chains and fulfillment in the country. "After this market, the markets get considerably smaller and the political impediments get greater", said Goldberg. Like Amazon, Walmart seeks to avoid missing its opportunity to secure a foothold in the growing digital sales market, as both companies did in China.

While this is Walmart's largest acquisition to date, the retailer's shares dropped four percent in early trade this morning, as Walmart warned the deal would "dent earnings" in fiscal 2019 per share by 25 cents to 30 cents, according to a report by Reuters. Walmart has failed to build its own business since 11 years of being able to operate in India. In Mexico, Canada and Japan, it's won shoppers over time.