Walmart has concluded its historic acquisition of India’s largest e-retailer Flipkart. Now that our local company Flipkart is in control of Walmart what are the likely scenario that will be unfolding in the course of time for the food processing industry is concerned, Rajat Baisya examines that here.
Walmart has just concluded its historic acquisition of India’s largest e-retailer Flipkart in competition with Amazon by biding a very ambitious price to acquire about 77% of the company for 16 billion USD based on the valuation of Flipkart at USD 21 billion USD which has surprised everyone and proved all previous predictions wrong.
However, if Softbank does not sell their holding immediately – because of short term tax liability for which they might be differing the sale of share for the time being – in that case, Walmart will have the controlling stake of over 54% of the total holding and will be still in control of the business. The latest news, however, is that Softbank confirmed its intention to sell its 22% holding in Flipkart. Soft Bank acquired 22% of Flipkart for about 2.5 billion USD only less than a year ago which is now fetching them about 4 billion USD.
Flipkart was started ten years ago by two former employees of Amazon, Sachin Bansal and Binny Bansal. What appears that Sachin was not in favour of the deal of outright sell-out but he could not stop it and decided to exit his entire 5.5% which will fetch him over I billion USD to start yet something different which he has been planning. But his friend Binny Bansal will continue in the new outfit under Walmart as its Executive Chairman. From many considerations, this is a historic acquisition and that too executed in Indian soil.
Firstly, Amazon and Walmart are competing in their homeland in USA. Walmart is the largest in retail format whereas Amazon is the largest in e-retail format. It would have made a great sense for Amazon acquiring Flipkart in India but Walmart has upset their plan by quoting a very high price for the stake and valued the business at 21 billion USD which has proved all predictions wrong about the valuation of Flipkart. Such high valuation in spite of the fact that Flipkart has been still reporting losses at the bottom line has puzzled many analysts. Such a huge acquisition has never happened before in India.
Second, Walmart entered E-commerce business and registered its presence in e-retailing in one shot and that too outside its home ground and in big scale which itself is a challenge to Amazon who has been a dominating force in e-retailing on a global scale.
Third, Walmart in India will be in all three formats, retail, cash & carry as well as e-retail whereas Amazon is in only e-retailing and the competition between two giants will now shift to India.
Fourth, Walmart now has got a foothold in India as they were having only twenty two cash & carry units as single-brand retailing permission for 100% FDI did not help much to global players as that has much other conditionality attached including sourcing from SME sectors.
Fifth, this mega acquisition in the retail sector must have given a strong signal to organisations like Swadeshi Jagaran Manch of the ruling party that with Swadeshi slogan, market forces cannot be stopped and retail scenario in India is going to be hit by this acquisition much to the disliking of Swadeshi supporters.
Now that our local company Flipkart is in control of Walmart what are the likely scenario that will be unfolding in the course of time for the food processing industry is concerned, let us examine that here. Although in USA Walmart and Amazon are competing in organised retailing and online e-retailing but in India, through Flipkart acquisition, Walmart will compete with Amazon in e-retailing as well and Walmart will have greater muscle in that because of their presence in both format.
Walmart will have a huge buying power to dictate terms. In India, there are a couple of businesses that depend only on Walmart’s contract. Besides, Walmart has large format cash & carry stores located and spread all over which will serve them as strategic warehouses to provide increased cost synergy in business to serve the customers more efficiently. The fight between these two global giants will, therefore, be seen to be intensifying in the coming days.
Online retailers have an association having 3500 members in India and they have petitioned to Competition Commission of India (CCI) for intervention as they felt threatened that Walmart will be selling only their store-level brands and will be a dominant player in the supply chain which will harm smaller online players’ business prospect. Earlier also this association protested against Walmart on single-brand retailing but this time they have filed a petition.
With financial resources and equally matching distribution reach together with a dominant presence in all formats of retailing as well as wholesale trade Walmart will eventually emerge in the retail industry in India as invincible. Manufacturers and marketers will, therefore, be heavily dependent on Walmart’s support.
Marketers will offer better discounts on the stock because of the huge volume that Walmart is expected to trade and that will give Walmart muscle of having additional trade margins to play competitive trade-in retail industry and that is the fear of small online retailers and traditional mom and pop retailers are apprehending. Mom and pop retailers have their small local customers to whom they extend credit facilities and in that scenario price is not the consideration but credit terms are.
Poor people always end up paying a higher price than normal and most often pay even more than MRP. However, a large segment of small retailers as well as small online retailers are likely to be impacted. Both Flipkart and Amazon were competing and heavily discounting stock and consumers were the beneficiaries of the rivalry between Flipkart and Amazon. This fight will continue but under Walmart Flipkart combine they will have now an increased muscle.
Walmart now can help to pick larger stock of agricultural and horticultural produce and that can be an advantage for our farmers. As Walmart is a global retailer they can develop infrastructure for the agri-supply chain and also can invest in technology to reduce the wastage which will further improve the competitiveness of our food industry in global trade. But the retail trade, as well as global trade and also farm level competitiveness, will have an increased level of dependence on Walmart.
As consumers are likely to be the ultimate beneficiary and they will drive the process of growth. With increased consumption, manufacturing organisations will produce more and market will grow and that will help in the capacity expansion to fuel the overall growth of the industry. But that might come at the cost of closure of smaller non-performing players and everything comes at a cost.
For the overall growth of the economy with consumption increasing and efficiency and productivity-improving, some polarisation of income and wealth is the price that we should be ready to pay. But in ultimate analysis industry is going to benefit in spite of the resistance from Swadeshi Jagran Manch. Global market force and investors will bring about changes that possibly cannot be stopped or easily reversed.
The author is the chairman of Strategic Consulting Group and served as Professor and Head of the Department of Management Studies, IIT Delhi.