How will Walmart-Flipkart deal impact India's e-commerce?

The success of the merger will depend on how it is able to effectively implement a world-class supply chain in India.

 |  4-minute read |   10-05-2018
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On Wednesday (May 9), a new chapter was written in the history of India’s e-commerce sector, which could clearly be called the start of a third wave in the segment. There were many naysayers when e-commerce entered India, for the second time in the mid-2000s. This was after its initial tryst a decade earlier with the Indian consumer, when, by the year 2000, it left behind such a trail of blood after so many e-commerce enterprises closing down, investors losing money and tens of thousands losing their jobs.

However, the second experiment has been much more productive, throwing up firms such as Flipkart, Snapdeal, Myntra and others that were successful in grabbing eyeballs as well as support from top investors from around the world. These businesses now commanded top mindshare among consumers, although they were yet to break the jinx of being profitable.

Now, it's time for the third generation of enterprises, driven by digital technologies and innovativeness, as exemplified in the operations of firms such as Walmart and Amazon, which also have deep pockets to invest in the race for more customers.

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The sale of home-bred e-tail company Flipkart to Walmart, the world's largest company with $500 billion in revenues, signifies a coming of age for Indian e-commerce enterprises. Although it may not be entirely palatable to the proponents of Swadeshi, it was inevitable.

Walmart, which has embraced e-commerce to survive the onslaught of e-tail firms, has found in Flipkart an ideal company that can help it take on Amazon in the second-most populous country in the world.

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According to reports, in the fiscal year to March 31, 2018, Flipkart recorded a gross merchandise value of $7.5 billion (more than Rs 50,000 crore), meaning that goods worth that value were traded through its site involving thousands of sellers and millions of buyers. That is, by no means, small. While this can be a win-win for both Flipkart and Walmart, how does the Indian consumer stand to gain?

Will he get better delivery of his products, in good shape and in a timely manner? Critics of the e-commerce model in India have often said how the deep discounts offered by e-commerce firms such as Flipkart were not sustainable, and that was the reason they could not make profits despite being in the business for a decade. For the financial year ending March 2017, Flipkart registered losses to the tune of Rs 8,770 crore despite revenues growing close to 30 per cent.

This was primarily on account of a five-fold increase in finance costs to Rs 4,308 crore, said reports, driven by a fall in valuation. The firm’s valuation fell from $15.2 billion in 2015 to $11.6 billion in April 2017 as the business model looked shaky and the new entrant Amazon began to give stiff competition. Critics say that the reason why Amazon could capture the mindshare of consumers was its customer-centric approach and its price sensitiveness, where it would offer daily "best prices" that were a result of its efficient supply chain and sourcing.

The success of Flipkart under the Walmart parentage would depend on how it is able to effectively implement a world-class supply chain in India, given all the challenges in the Indian context. According to Supply Chain Digest, Walmart stocks products made in more than 70 countries and at any given time, operates more than 11,000 stores in 27 countries around the world, and manages an average of $32 billion in inventory. As early as the 1980s, Walmart had begun working directly with manufacturers to cut costs and more efficiently manage the supply chain.

Its supply chain initiative, Vendor Managed Inventory (VMI), made manufacturers responsible for managing their products at the retail giant’s warehouses, resulting in nearly 100 per cent order fulfilment, decades ago.

Another big battle that will open up between Walmart and Amazon in India will be in the food and grocery segment. Last year, Amazon received government approval to start a venture to sell locally produced and packaged food items through offline and online channels.

According to reports, Amazon’s fully owned subsidiary Amazon India Retail Pvt Ltd is currently selling food items online in Pune on a pilot basis. Walmart is expected to use a good part of its investment to build infrastructure including food parks, cold chain and collection centres.

Food is already an important part of Walmart’s cash-and-carry business in India, comprising around 60 per cent-65 per cent of sales annually. With the Flipkart buy, we can look forward to more activity on this front from the company.

Is it the beginning of serious consolidation in the Indian industry, which we first saw in the pharmaceutical space and later in telecom?

Possibly, yes.

India is too big a market to ignore for multi-national companies, especially those restricted by the norms regarding multi-brand retail. As home-bred companies struggle to take their firms to a more profitable plane, an innovative approach from companies with deep pockets can become a game-changer.

Also read: Flipkart-Walmart deal: How India just rolled out the red carpet for digital colonisation

Writer

MG Arun MG Arun @mgarun1

The writer is Deputy Editor, India Today.

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