After much deliberation, on May 10, 2018, US retail giant Walmart Inc acquired India’s largest online retailer Flipkart. In what is termed as the world’s biggest purchase of an e-commerce company, Walmart bought a majority stake of 77% in Flipkart by paying $16bn (£11.8bn) to be precise. Flipkart is now valued at more than $20bn. However, before we move ahead, it is important to understand what we mean by an acquisition.
An acquisition happens when one company (usually large in size) purchases most or all of another company's shares so as to take control of its operations. When a buying company obtains more than 50% ownership in a target (to be acquired) company, it is said that the former company has acquired the latter’s business.
Online e-commerce retail sales in India are expected to reach 52.30 billion US dollars in 2022 from 16.07 billion U.S. dollars in 2016 (Statista). According to Harish HV, a Bengaluru-based management consultant, Walmart will now be able to take advantage of the expertise built within Flipkart in the past years (first to introduce cash on delivery option) on how to compete in the e-commerce marketplace. Furthermore, this deal will also give it a strong twofold platform in a large market like India which is active both online and offline. This can be cited as one of the foremost reason of their buyout.
Flipkart, on the other hand, got ready to be acquired as it could grow faster and turn to profitability sooner (having failed to show any profit in last 10 years) taking advantage of the financial strength and efficient supply chain systems of Walmart. Also, having an offline presence has become a must nowadays. With even Amazon partnering under Project Udaan and having a stake in ShoppersStop, Flipkart surely needs to go offline where Walmart can provide its expertise. In all, you could say, it is a win-win situation for both. But there are 2 perspectives from which this deal can be looked upon, one from the Indian side and the other from the US side.
Amazon, a key Walmart competitor in the U.S. and Flipkart’s key competitor in India would be targeted as this deal will pit Walmart and Amazon against each other in the Indian market, i.e., USA vs. the USA, which will help boost the online share in overall retail. Furthermore, with the acquiring of Flipkart, Walmart has a great opportunity to expand and gain access to wider Asian Markets especially when it has been looking to establish its foothold in India for the past 10 years but couldn’t due to strict FDI rules and had unsuccessful attempts in China and Japan. Even though Walmart operates 21 Best Price wholesale stores in India, it has no presence in the retail paving way for other retailers to dominate and grab the opportunity.
No space for local competition
With ultra-low prices, a $500 billion American giant, Walmart has the ability to completely wipe out online as well as offline sellers, both new and old. Afraid of the highly competitive pricing of products, sellers will find it extremely difficult to sell their own products. This kind of threat to brick and mortar stores will leave no space for local competition. Contrary to this, with such low prices, consumers will have access to even more variety, thereby giving them the freedom of making a choice. A wide range of inexpensive goods in categories like food and drink, personal hygiene products, small home and garden tools, office supplies, decorations, electronics, garden plants, toys, pet supplies, remaindered books etc, is sure to draw in customers looking for an array of goods.
“Make in India” campaign
There have been mixed reactions on whether this acquisition has done more good or bad to Prime Minister Narendra Modi’s ambitious Make in India campaign. Some say, that foreign direct investment (FDI) in multi-brand retail will destroy entrepreneurship. With Walmart being the world’s 7th largest importer of Chinese goods, it would start selling its cheap products in India as well, thereby killing the Make in India dream. While others believe that through direct procurement, increased export opportunities, and partnering with Kirana owners and members, Walmart would help in modernizing their retail practices, adopting digital payment technologies, ultimately giving a boost to the Make in India campaign.
With more investment flowing in Indian economy especially in retail, capacity utilization is bound to improve. Output and productivity growth can create new employment opportunities for both skilled and unskilled labour. Moreover, with competition between Amazon and Flipkart intensifying, it is very likely that a huge supply chain infra would be created, along with the creation of a large number of jobs.
Efficient supply chains
Efficient supply chain and logistics which require infrastructural development would be provided by Walmart, which in turn will boost Indian agriculture and infrastructure. It would also benefit farmers as they would be able to cater to more demand. This can especially be useful for the perishable goods industry which is Walmart’s strong point.
Foreign Direct Investment
Lack of consensus appears here as well with some opining that FDI will increase in the country while others think otherwise. Opponents believe that since Flipkart registered itself in Singapore (as the country’s corporate laws are easier), all the money will go outside India, either to the USA or to Singapore. And this definitely is a big dent on the government’s claim of increased FDI.
The latest buzz is that Walmart Labs (technology arm of Walmart) is looking to acqui-hire tech start-ups from the country. Acqui-hire means to buy out a company chiefly for the skills and expertise of its staff, rather than for its products or services provided. But unlike the acquisition of Flipkart, this would involve smaller amounts. The question which still remains unanswered after all the discussions is that whether companies like Flipkart selling their businesses to outsiders is justified and if yes then to what extent.
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Image credits: Walmart-Flipkart
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