Battle for Supremacy in Indian Retail Sector

Author : Siddhartha Dua

When finally the news of Walmart acquiring Flipkart started trickling in after grabbing the headlines for many days many people including myself thought that this is another kind of colonization, digital colonization where in an American company led by Bentonville beast is all set to acquire an Indian bellwether ecommerce firm Flipkart and this surely was not music to Indian ears who take immense pride in their IT sector. There have not been many successful Indian startups but here was a startup founded by two IIT Delhi graduates which reached the pinnacle of corporate success and attracted astounding valuations and above all was an aspirational brand for many budding entrepreneurs in Gurgaon, Bangalore, Hyderabad, Mumbai rather whole country. Story of Bansals is a part of famous Indian ecommerce folklore.

The mere thought of this company getting into the hands of Americans was repulsive as many of us thought that Americans have once again taken our prized possession but delving deeper into the matter and studying the financials of both Walmart and Flipkart one can well realize that there is nothing of the sort. On the contrary Indian founders have got a sugar coated deal and also Walmart might have just provided the succor which bleeding Flipkart so badly needed.

Walmart is going to buy 77% stake in Flipkart in which majority share is held by Singapore registered entity Flipkat Singapore. As such Flipkart was never an Indian company as their major shareholders were all foreign funds and banks. Soft bank US and Tiger Global are the major shareholders controlling over 43% stake in Flipkart, Naspers, the South African Media giant holds 11% and Tencet the Chinese ecommerce firm hold another 6%. Owners Sachin and Binny Bansal together hold another 11%. It is this share which Walmart is buying so there is no question of an American company taking over and Indian Company rather at $ 20.28 billion valuation of Flipkart seems to be too high and shareholders of the company have escaped with a brilliant deal.

Walmart led by their ambitious CEO Doug McMilon decided to take a plunge into lucrative Indian ecommerce market in direct competition with Jeff Bezos. All major retail players across the world want to have a share in the eye popping $ 650 Billion retail market which is mainly dominated by small kiryana stores. Only 11% of Indian retail is organized retail. By organized retail we mean who have registered their firm and pay taxes for their business. But even this 11% is not a small number. It is increasing at a very rapid rate probably more than anywhere else in the world. Indian retail sector is likely to touch a mind boggling figure of $1 Trillion by 2020 and that is what is so enticing for all the retailers. Chinese retail market size is much bigger at $ 3.0 Trillion and US is the biggest market with $ 4.3 Trillion. If we look at the sheer numbers, Indian retail market there is a huge upside potential, barriers to entry are not high and bargaining power of suppliers is not much. There are a lot of suppliers for grocery in India and a big retailer with deep pockets can really squeeze those suppliers. There is a threat of substitutes like neighborhood kiryana stores who have also stared home delivery as well and specialize in customization which organized retailers can never match. These small stores are well versed with the demands of the customers and know their tastes and preferences.

Organized retailing in multi brand retail was started in the form of Big Bazaar by Mr. Kishore Biyani in the year 2001 and Indians who till now were dependent on whims and fancies of local shopkeeper to show them the product now had the option to look and feel the product. Setting up of organized retail was indeed the water shed moment in Indian retail industry as consumers were till then dependent on shop keepers to handover the product to them were now spoilt for choices.

By 2010 organized retail in India was only 4% but with the advent of Easy Day, Aditya Birla Group’s More, Marks and Spencer, Tata’s Trent and other fringe players organized retail has come up with leaps and bounds. Even though Indian Government has not allowed foreign direct investment in multi brand retail but but there is no such restriction in online retailing. Walmart and Amazon are the biggest players in the business and are targeting the Indian buyers thru this medium. There will be an equity infusion of $2 Billion by Walmart into Flipkart to spruce up the sales, Amazon is equally bullish on Indian market and plans to inject $ 5 Billion. But what does the Indian retail sector hold for the global biggies.

Amazon which is already present in India has reported losses to the tune on Rs.3000 crore on net sales of Rs.15684 crores and Flipkart also has continuously posted losses. Amazon is a technology company and has launched various new products in India like Kindle, Alexa, fire stick etc. and has been in India for past five years and has significantly build up its presence whereas Walmart which was present in cash and carry format also wanted to have a bigger pie in Indian retail market after burning its fingers in other Asian countries. However Indian market has not been an easy market to capture for global players right from Pepsi to coke have found it hard to reach what CK Prahald calls bottom of the pyramid. Bottom of the pyramid has remained elusive to foreign multinationals.

Looking into the present scenario Indian online retailing sector is $ 38.5 billion out of which Flipkart and Amazon together hold 64% of the market share. Even though this sector is growing at CAGR of 20% but at the same time firms which are operating in this space are bleeding . All Indian ecommerce firms are badly in red. Flipkart reported a net loss of Rs. 8700 crores for the year ending march 2017and Amazon India operations reported a loss of Rs. 3000 crores. Indian online retailing which is only 3% at present is likely to touch 11% by 2025 and considering the retail sector will be $ 2 Trillion by that time one can expect it to be a @ 220 billion market. Now that’s a mind boggling figure both these giants might be looking at but Indian market is very different from Chinese and US market because in India tax rate across ecommerce and retail is same unlike US and china where there is no tax on goods sold online which enables the ecommerce companies to pass on the benefits to the customers.

Walmart which is already present in India thru its cash and carry model is looking to build up its network so that is ready when the Government opens up multiband retail.

In the present scenario company which is best placed to take maximum advantage is Reliance Retail, Reliance retail posted a revenue of Rs. 33000 crores and an EBIT of Rs. 784 crores for the year 17-18. Reliance Retail has a network of 3751 stores across India, what was a loss making business in initial years has become more profitable now. Even though profits from Reliance fresh are low because of high rentals and wafer thin margins but still it seems reliance has gone thru the learning curve and has learned the tricks of the trade.

While Reliance retail has so far not ventured into the ecommerce space but still is well placed to leverage its technology with robust supply chain and can very well be a market leader in organized retail in India like Alibaba is in china. Alibaba controls 70% of retail space in China, it has both online and physical presence and has mastered the Chinese market.

Walmart is a pure retailer unlike Amazon which is technology company , it is retailer which takes pride in developing robust supply chain and then squeezing the suppliers and delivering EDPLP model. With this acquisition of Flipkart Walmart might just acquire technology to become a better player in ecommerce space. But till that time the only player which seems to have benefitted immensely from this deal are the founders who have got a sweet deal from Walmart.

As for Walmart one can best hope that it gets a bigger pie in Indian retail sector otherwise it might turn out to be the case of eating a humble pie.

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Data Source : Business today