Indian e-commerce – Play defence.

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I don’t think that India is Walmart’s priority.

• Walmart’s agreement to take a controlling stake in Flipkart has all the hallmarks of a defensive move to throw a spanner in Amazon’s plans for global domination.
• Walmart will purchase a 77% stake in Walmart for $16bn where Tiger Global, SoftBank and Accel are mostly cashing out leaving the founders, Tencent and Microsoft as shareholders.
• Of the $16bn, $2bn is being offered for new shares meaning that the cash goes to the company rather than to exiting shareholders.
• This will be badly needed if Flipkart is to have any hope of preventing Amazon from dominating the Indian e-commerce market.
• In e-commerce, dominance is critical to making a good return as these companies are network businesses just like Uber, Alibaba, AirBnB, Craigslist and so on and consequently, they are bound by the same rules.
• 2 years ago I proposed a rule of thumb that states: A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rival to begin really making profit (see here).
• Following the collapse of merger discussions with Snapdeal, Flipkart managed organically to take the majority of Snapdeal’s business propelling it comfortably above the required 60% share (see here).
• However, this was a claim made by Flipkart’s shareholders and given that Flipkart is expected to carry on losing money for some considerable time, I question this assertion.
• Either way, it is clear that Flipkart has an opportunity to cement its lead over Amazon, but it will need a lot of money to do so, leading to its willingness to sell out to Walmart.
• I suspect that Flipkart has also obtained guarantees from Walmart that it will continue to support the current growth strategy and not get cold feet.
• This is something that could easily happen because Amazon is losing somewhere between $500m – $700m a quarter (~$6.6m per day) in India and is absolutely determined not to lose this market as it lost China to Alibaba.
• The result is almost certain to be a bloodbath of cutthroat competition which will now be even more brutal as Flipkart has a massive backer and access to capital.
• From Walmart’s perspective, I think that this more about defending its position at home than it is about being excited about a growth opportunity overseas.
• In its investor materials for the transaction, it puts India along side China as a growth opportunity, but Walmart has completely failed to make any meaningful impact in China.
• However, ever since the acquisition of Whole Foods by Amazon, Walmart has been deeply concerned about what Amazon may do to its core grocery business.
• Amazon is extremely aggressive and possesses an inventiveness and initiative than Walmart can never hope to match.
• Hence, I think that this acquisition is more about keeping Amazon busy and bleeding overseas and limiting its ability / desire to stick the knife in at home than it is about a new growth opportunity.
• If Amazon quickly dominates the Indian market and turns it break-even, then that will represent $2.8bn per year of investments that can be made in making Walmart’s life miserable at home.
• Keeping Flipkart in the fight will give it time to work out how to push back against Amazon as well as learn a thing or two about how to conduct a successful e-commerce offering.
• The fight is now really on for the Indian market and I think only one will emerge victorious.
• At the moment, I think Flipkart has the edge as it appears to have much higher share than Amazon, but it would be foolhardy to count Amazon out just yet.