The Flipkart and Wal-Mart Alliance

Flipkart is amongst the largest unicorns in the Indian startup ecosystem. Wal-Mart is a known international retailer with revenues upwards of $400 billion. Both of these companies are formidable in their own fields. However, they are set to merge. Wal-Mart has valued Flipkart at $18 billion and is all set to complete the acquisition. This is good news for shareholders of Flipkart. This is because this valuation is significantly above the down rounds that they have received in their past few funding rounds. There were speculations that Flipkart will not sell its fashion arm to Wal-Mart. However, these speculations have been silenced as Wal-Mart has announced that they will acquire Flipkart completely including the fashion wing.

This deal has come as a surprise for many people. However, many critics are of the opinion that the Wal-Mart-Flipkart deal is a match made in heaven. This is why Flipkart rejected the offer of many suitors including Amazon and finally chose Wal-Mart to partner with.

In this article, we will understand why this deal is beneficial to both the parties.

• The Amazon Issue: Both these parties have one common competitor i.e. Amazon. Wal-Mart has a significant history of competing with Amazon. At the present moment, Wal-Mart has revenues and profits that are at least three times as large as Amazon. However, the market capitalization of Amazon is still larger than Wal-Mart. This is because the market perceives Amazon as an innovative company that will soon overtake Wal-Mart.

  On the other hand, Wal-Mart is viewed as being defensive. This is because a large section of the population is getting hooked on to online shopping and Amazon is the leader in online shopping.

  Wal-Mart wants to create a presence. They are already struggling to create this presence in the United States. This is the reason why they don’t want to start from scratch in a promising market like India.

  On the other hand, Flipkart is an established brand in the Indian consumer’s mind. However, they do not have the financial strength to match the deep pockets of Amazon. This deal will, therefore, benefit both parties. Wal-Mart will receive access to the fastest growing market in the world. On the other hand, Flipkart will receive the funds that it needs to take on and defeat Amazon.

• Access to India: Wal-Mart has made attempts to enter Indian markets before. However, they have not been able to access the market. This is because no government will allow mega-corporations like Wal-Mart to enter the market. It will be politically very unpopular to do so. To circumvent this, Wal-Mart has tried becoming a minority partner in an offline venture with Bharti Enterprises. However, that did not work out too well for Wal-Mart.

  Wal-Mart has now understood that it is unlikely for them to get a majority stake in any brick and mortar retail store chain. Hence, they are going the online route. The partnership with Flipkart gives them access to the Indian market. They also become the majority player with a controlling stake in the organization. This is precisely what Wal-Mart wants which is why Flipkart is the perfect match for them.

• Weakening Support System: Up until now, Flipkart has only taken money from financial investors like Tiger Global, Softbank, Temasek, etc. These funds have no interest in the long-term viability of the firm. The holding capacity of these funds is also less. These funds have to return money to investors every few years. Hence, they are continuously worried about the IRR. On the other hand, Wal-Mart is in it for the long term. They are willing to take losses early on if required to stop the march of Amazon and cement Flipkart’s position in the market.

  Flipkart has seen its valuation go down in successive rounds of funding. This is because investors are reluctant to invest more money given Flipkart’s cash burn rate. The conclusion is that Flipkart would have faced a shortage of funds had it relied only on financial investors. By roping in a strategic investor, they are avoiding a future crisis.

• Knowledge Sharing: Wal-Mart was facing a similar situation in the United States. The company acquired Jet.com and its online sales have increased manifolds.

  Wal-Mart also has access to some revolutionary technology built by Jet.com. More importantly, Wal-Mart has many private label brands which they are able to manufacture at rock bottom rates given their extensive supply chain in China. It would be easy for them to market these products in India as well. Since these products will be priced lower than the competition, it will give Flipkart the edge. The gross merchandise sold by Flipkart is expected to rise manifold after Wal-Mart acquires the company.

Issues with the Acquisition

There are two major issues with the acquisition:

1. Firstly, from Wal-Mart’s point of view, it appears that they have overpaid for Flipkart. The valuation is quite hefty, and it may be difficult to turn a profit with such high expenses. Wal-Mart could have purchased Flipkart a few years back for a fraction of the cost. Not making an early move can be considered to be a strategic mistake by Wal-Mart.

2. Secondly, Wal-Mart has been successful by using its offline model. It takes orders online but fulfills them using offline channels. Since they do not have any offline channels in India, their competitiveness needs to be ascertained.