Since the past week, I’ve received over 100 enquiries from global media houses, venture capitalists, private equities and other stakeholders at large about Walmart acquiring Flipkart. While I’ve been actively fielding these enquiries, below is a quick summary of the questions and my responses to them. As you will gather, these questions are largely about the deal terms and structure, value to the industry and most importantly, the benefit to consumers. Here goes…
Q1. What is the deal size and overall terms?
SVG – As per our estimates at Greyhound Research, the deal should be in the range of USD 14.5 – 15.5 Billion (at a valuation of approximately USD 20 Billion) with Walmart taking equity in the range of 71 – 72%. We expect Alphabet to come in at an additional 10% equity amounting to an investment in the range of USD 1.5 – 2 Billion.
Q2. Will the Founders, Management and Softbank stay put in Flipkart?
SVG – Per our understanding of Greyhound Research, this deal is more inclined to be a partnership than an acquisition which allows Flipkart to continue operating in a near as-is fashion. This clearly seems to the new working model for Walmart across the globe where it’s more inclined to partnerships rather than its earlier held belief of doing everything on it own. The company has established partnerships in key markets like Japan (Rakuten), China (JD.com), UK (Sainsbury-ASDA), US (Google) among others.
While we expect Kalyan to remain at the helm and Binny to likely be the executive chairman; this deal will see Sachin Bansal opt for a final exit. Separately, with Softbank, since they came in much later as an investor in Flipkart, it will be in their best interest to exit and ensure minimal tax impact. Of course, they may have to time their exit to minimise this impact.
Q3. Wouldn’t Amazon acquiring Flipkart make more sense?
SVG – Actually not. The coming together of Walmart and Flipkart in India is a marriage wherein both parties bring equally to the table. Per our estimates at Greyhound Research, eCommerce share of total retail sales in India is expected to cross 5% by 2020. The duo, Walmart and Flipkart, will not only be able to tap into this 5% but also build on existing network and infrastructure of Kirana stores and other community infrastructure and target the market at large.
In the case of Amazon, Flipkart and investors would have had to let go of a lot more control and pretty much align the entire company with the Amazon structure and processes. Most importantly, this would have been an eyesore for Competition Commission of India and wouldn’t have gone through at all. Hence, Walmart–Flipkart is a partnership that can be expected to add value to investors and deliver long-term shareholder value.
Q4. Is Walmart using this deal as a backdoor entry in the Indian retail sector?
SVG – Walmart (or any other entity of its type) cannot use acquisitions in India as a backdoor to establishing a retail presence in the country. The laws of the land are clear and do not allow a company like Walmart that is a multi-brand retailer to own more than 51% via the FDI route. We at Greyhound Research see no reason for a company like Walmart or the like to violate these laws.
Q5. Is Walmart going to merge Flipkart’s business with its Cash & Carry business?
SVG – Per our understanding at Greyhound Research, Walmart’s existing Cash & Carry store business in India can be expected to continue as a separate business unit and not mixed with the eCommerce business.
Per our estimates at Greyhound Research, the Indian retail market is currently pegged around USD 650 Billion and with 90% of it being unorganised. It is a well-known fact that Walmart runs this business very efficiently. It doesn’t make sense for them to leave such a cash cow where there is hardly any competition and upside is so huge. With this, they can not only continue to serve large Kirana driven traditional market but will also be able to serve the growing B2C consumer market. So best of both the worlds.
Q6. What synergies do you see between both parties?
SVG – At Greyhound Research we are of the view that Walmart is more of a logistics and a supply chain company than being a retailer. At the core of their operations, Walmart has achieved excellence when it comes to moving and managing physical goods across the globe in as many efficient ways as possible.
With the proposed acquisition of Flipkart, the company will be able to extend this expertise to managing physical goods in the digital world – a strength that Flipkart lacks. To put this in context – supply chain is also the strength of Amazon, Flipkart’s ace competition. This strength, we at Greyhound Research believe, is a significant differentiator in a marketplace dominated by thin margins and worsened by steep discounting policies.
Having said that, expect enough and more synergies (and investments) to be drawn between the respective businesses in the areas of sourcing and selling of agri-based products, supply chain management, warehousing operations, technology back-end and most importantly using existing network and infrastructure of Kirana stores to reach consumers among other areas.
What is of particular interest is the opportunity for global Walmart sellers to sell in India via the Flipkart marketplace and the Kirana stores and Flipkart’s private labels to sell via the Walmart global networks.
Q7. Flipkart has already tried to enter the grocery market so how will this change moving forward?
SVG – Albeit Flipkart has made credible attempts, they haven’t been able to scale this business due to the lack of expertise and depth in agri-based products. Walmart, on the other hand, has exceptional understanding and network in this area and we can well expect the combined entity (under Walmart’s guidance) to focus significantly on selling groceries and other agri products via both the Flipkart marketplace and Kirana stores.
Q8. How do you expect Kirana stores to benefit from this deal?
SVG – Walmart brings to the table a deep and solid understanding of using the network of existing retail infrastructure and adding technology to it to offer real-time status on stocks. This understanding will come in handy for Flipkart in its journey of onboarding existing Kirana stores as its feet-on-street to stock and supply products.
Per our estimates at Greyhound Research, we expect the combined entity to modernise at least 10 million Kirana stores over the next 3-5 years by way of enabling digital transactions and modernising retail practices at large. More specifically, we expect a more significant push for UPI based transactions through PhonePe. This last-mile connectivity via Flipkart for consumers we estimate will enable approximately 100 Billion transactions in the next 3–5 years.
Q9. Isn’t this deal an anti-thesis to the success and viability of traditional Kirana stores?
SVG – If we were to draw parallels then we must compare Walmart’s acquisition of Flipkart with the Booker model in the UK. We must not lose sight of the fact that India’s retail sector continues to be unorganised in the tune of 90% and is in a dire need to transform into a model that is both inclusive and efficient.
What most Kirana stores need is the scale at the backend supported by best-in-class technology to deliver exceptional experiences. The Walmart acquisition of Flipkart proposes much the same, and we at Greyhound Research believe this is India’s long-awaited chance to transform its retail sector in one-shot. In essence, this has been a partnership waiting to happen. Even bodies like Swadeshi Jagran Manch (SJM), The Confederation of All India Traders (CAIT) would be keen on such a change since it will be a win-win for Indian consumers, farmers, Kiranas, and the government.
Furthermore, detailed discussions with distributors tell us the significant pressures they face in their current business model and their desperation to either transform or shut shop. This alliance (in theory) proposes an efficient and modernised supply chain structure that will not only improve distribution but more importantly create jobs.
A company of the size of Walmart can be expected to solve the current gaps that consumers in tier 2 and 3 towns of India (including rural India) face while shopping online by way of investment in showcase centres that allow consumers to touch, look and feel products that they may never otherwise buy online. It takes muscle, intent and depths of expertise to create such pools of community infrastructure much needed to expand and grow the Indian retail sector.
Q10. What challenges do you believe this deal will pose for both parties?
SVG – While there will be multiple challenges, here are key challenges that the combined entity will face upfront.
Current Organisational Structure & Combined Entity Restructuring – Currently headquartered in Singapore, Flipkart has more than a handful of investors and more importantly a complex reseller structure that allows the company to be compliant with local laws and yet control majority sales. Three of their highest sellers are their own companies namely Flipkart Smart Buy (they sell in 20–25 categories), Digiflip (they sell bags and electronic accessories) and WS Retail. This structure will get further complicated by the three entities run by Walmart in India namely Walmart Cash & Carry, Walmart Sourcing and Walmart Technologies. The new organisational structure will have to bring together these disjointed companies under a single umbrella. We at Greyhound Research are of the firm belief that the combined entity must take a holistic view of the country and the spread of companies. Walmart must explore a holding company structure to achieve its goal of offering omnichannel experiences to consumers.
The Composition Of Board Of Directors – With Sachin Bansal and SoftBank deciding to sell out and Walmart intending to use this deal beyond eCommerce, it is of absolute importance that the new Board composition comprises of existing Flipkart management, key investors and most importantly a fair representation from Walmart. To make the most of this deal, ideally, Walmart should have representation by way of its India CEO, CFO and a nominee from global operations. However, Walmart will have to play it well because in the past their attempts at smooth integration in markets like Brazil haven’t gone well at all.
Complexities Arising Out Of Tax Treaties – Albeit Tiger Global will not find itself in a tax net since it was one of the early investors in Flipkart when the laws were not so stringent, other investors like SoftBank, including the Founders, will need to pay significant taxes. Separately, with the Walmart technology arm based in an SEZ, the combined entity will have to carefully structure and master issues around transfer pricing.
Differences in Culture and Attitudes – Often, mergers and acquisitions that may otherwise seem smooth and strategic (in theory) turn out to be the most complex and impossible to manage. Walmart’s highly governed structure is a stark contrast to Flipkart’s fluid start-up culture. How the duo manages this, and other differences will define the success (or otherwise) of this deal.
Q11. Will Walmart find value in the technology assets of Flipkart?
SVG – Over the years, while Flipkart has invested deeply in technology to support its Big Billion Days and other campaigns, it largely remains a relatively young technology setup with a heterogeneous stack. While one can go to great depths to talk about the products that Flipkart uses, it is important to note that it may well happen that Flipkart’s technology team eventually works closely or maybe even becomes a part of Walmart’s technology subsidiary.
What is of peculiar interest and importance to Walmart is Flipkart’s in-house eCommerce tool which it uses to engage its sellers in a B2B setup. While this tool will need much work and investment to ensure it works for Walmart’s reseller base, it can be used in a plug-and-play manner in the eventuality. Also, Walmart will find immense value in the Flipkart Data Platform that allows teams to consume data and process it in real-time.
Lastly, Walmart has partnered with IBM in China to use Blockchain to not only improve food safety governance and transparency but also use this technology to allow instant detection of food-based epidemics and the capability to remove groceries and other food products from retail shelves in a matter of hours and days. Such partnerships and innovations will also come to use for Flipkart.
Q12. Why is Alphabet keen on this deal? Does it not see a threat from Microsoft, an existing investor in Flipkart?
SVG – It is important to note that Alphabet is the holding company of Google and does not directly engage in the day-to-day operations of the latter. Alphabet’s intent since its formation has been to invest in futuristic business models with technology at their core.
While Google and Microsoft are competition but given the heterogeneous technology environments, there is enough and more room for the technology of both these companies to be used in tandem in the Walmart-Flipkart entity. What is also of importance is that Alphabet’s expected investment is nearly ten times (USD 2 Billion) to that of Microsoft’s (USD 200 Million). The more invested have a bigger share of voice.
Q13. How do you believe this deal will impact competition? And how will this impact the industry at large?
SVG – To put this in context, Flipkart’s biggest competition comes in the form of Amazon, Paytm Mall, TataCliq, Shopclues and the like. While Amazon is expected to be the most closely impacted, we must not discount the impact on Paytm Mall and its key investor Alibaba. For reference, Alibaba has been on an acquisition spree and recently took control Ele.me marking its foray into logistics and brick-and-mortar assets. Further, only yesterday they have also acquired Rocket Internet’s online retail company, Daraz. These acquisitions go to show their laser-sharp focus on building assets and capabilities to put up a serious fight against Walmart and Amazon.
In the light of this aggressive and head-to-head competition between the Big3 namely Walmart (including Flipkart), Amazon and Alibaba (read Paytm Mall) we can well expect further consolidation and acquisition of specialised eCommerce companies that will allow the Big3 to gain dominant market share in newer segments. Over the coming years, Greyhound Research believes the Indian eCommerce market will be dominated by these Big3.
For the Indian start-up ecosystem at large, this will be a morale booster given the lack of exits or buyouts of unicorns till date. This global attention by way of an acquisition will be a confidence builder for existing start-ups being forced by their investors to hit the IPO button. This acquisition strongly conveys the maturity of the ecosystem in the country and the possibilities of a multi-billion dollar exit.
Q14. How do you believe this deal will impact the Indian consumer?
SVG – As mentioned above, one of the many outcomes of the intense competition between the Big3 will be an investment in newer categories like grocery, furniture among others. This will give the Indian consumer availability of new product types which otherwise were not available online. Furthermore, these Big3, to outdo each other, will bring in global stocks and sellers to the local marketplace – this will solve a long-standing complaint of the Indian consumer of the unavailability of some of the world’s best products.
Another key outcome for the consumers will be better-managed deliveries given the increase in investment in supply chain and infrastructure. This will also translate to the availability of products in Kirana stores which implies better pricing, quicker deliveries and overall better service levels.
Q15. Will Flipkart still go the IPO way?
SVG – At Greyhound Research, our ongoing tracking of global start-ups tells us that Walmart will want to continue to enable Flipkart on its journey of IPO. While this will allow better outcomes for stakeholders, it will also be a win for Walmart and offer better returns on the steep price of USD 15 Billion. We at Greyhound Research estimate this IPO to be launched in the next 3–4 years and not anytime earlier.
On a closing note, the timing of this deal is both interesting and intriguing. A company (read Walmart) that started in India on a sticky wicket with Bharti and ran into wrong quarters with the government has since opened only 21 Cash & Carry stores. The same company has all of a sudden had a change of heart and decided to buy majority (not minority) stakes in one of India’s largest and most successful start-ups. This, we at Greyhound Research believe, is not a mere coincidence.
If one were to put the pieces together, this investment has been triggered only after a dramatic shift in India’s image abroad thanks to PM Modi and continued progress on World Bank ‘ease of doing business rankings’. Per our observation at Greyhound Research, much change was triggered when PM Modi met top US CEOs in Washington DC, and they were queued up to meet him that too on a Sunday morning. The sight of such a lineup can change views of anyone who may not be bullish on India. Walmart CEO Doug McMillon was one of them.
With the country going to the polls in 2019 and economic uncertainty only expected to increase, Walmart deciding to open its purse strings in 2018 while the Modi government is in full swing may well have been the smartest decision they’ve taken.
Copyright © 2018 Greyhound Research. All rights reserved. You may share this research note using the options made available. Please don’t copy this research note (complete or parts) and distribute over the web and emails. Connect with us if you need clarifications.
Sanchit Vir Gogia: Sanchit is the Chief Analyst, Founder & CEO of Greyhound Research, an award-winning global research & advisory firm. To read more about him, click here.