Call it optimism of the will if you like, but India’s growth story sells. By investing $16 billion in India’s biggest online retailer Flipkart, US retail giant Walmart Inc. is betting on an exponential growth in India’s middle class as it battles Amazon.com Inc. in the global e-commerce space. The jury is out on whether Walmart’s gamble will be successful but it is good news for Indian consumers who stand to benefit from increased competition and lower prices.
Details on how the US retail giant would fund the acquisition are yet to be disclosed but Walmart is expected to use the proceeds from its stake sale in UK grocery store Asda to J Sainsbury plc earlier this year to fund the purchase. That Walmart sees India as a better bet than the UK is no doubt triggered by optimistic forecasts about India’s booming middle class and forms a part of its strategy to invest in higher growth markets. However, acquisitions can be ego-driven and analysts would be right to query whether the latest purchase is simply a case of Walmart not wanting to be left behind in the turf war with Amazon.
Flipkart, India’s online market place founded in 2007 by two former Amazon employees, is currently losing money and is expected to generate losses at least in the next few years. So, what explains the optimism and the hefty price tag? Walmart hopes to leverage Flipkart’s fashion business, as well as its digital payments infrastructure and local talent pool. The Indian company has 54 million active users across all brands and recorded gross merchandise value, a proxy for total sales, of $7.5 billion and net sales of $4.6 billion, representing more than 50% year-over-year growth in both cases for the year ended March 31.
The deal is essentially an investment in the future and is predicated on forecasts of a massive growth in the e-commerce in India. Morgan Stanley has estimated that India’s e-commerce market will grow to $200 billion in about a decade from about $30 billion today. That’s a massive jump. Similarly, India’s online grocery market is miniscule at around $100 million but is expected to be worth billions in the coming years. Whether such numbers play out remains to be seen. India’s broadband infrastructure is rickety at best and it is unclear how much of the online consumers would come from rural areas where a large part of the population resides.
The size and purchasing power of India’s middle class is also debateable. The Economist in an article titled “India’s missing middle class” pointed out that a lot of the middle class in India has little money to spend. It said “there are many rich people in India—but they number in the mere millions.” Companies that have tried to tap the Indian opportunity have found that returns fell short of the hype and that forecasts of a more than five-fold increase in e-commerce sales were implausible. An article by the BBC pointed to differing definitions of India’s middle class. One definition that puts nearly 50% of India’s 1.3 billion population as India’s middle class doesn’t entirely convey a lifestyle associated with cars, washing machines, computers and credit cards, it said.
Indeed, Walmart shares fell on news of the deal. The acquisition, according to the US company, is expected to shave off between 25 cents and 30 cents per share from Walmart’s earnings this fiscal year and reduce earnings by 60 cents per share next fiscal year. Ratings agency Standard & Poor’s lowered Walmart’s outlook to negative from stable, citing increasing leverage (debt) and risks stemming from the company’s spending to expand online.
For India, however, the deal is the biggest foreign direct investment in the country’s history. Walmart was quick to point out the benefits of increased employment opportunities, access to cold-storage technology for groceries, improved supply chains and lower prices. The company, which already has 21 cash-and-carry outlets in India, has said it would continue to work with local manufacturers and the farm sector, countering protests and concerns raised in some quarters that the deal is a sell-out to foreigners. Walmart also plans to add 50 new cash-and-carry stores in the next four to five years.
Among those protesting the deal is the Swadeshi Jagran Manch, a group linked to Rashtriya Swayamsevak Sangh, the ideological parent of Prime Minister Narendra Modi’s party. The group said the deal is against “national interests” and will hurt Modi’s “Make in India” initiative. The concerns seem exaggerated. For one, India has allowed 100% foreign direct investment in online retail consumer businesses that operate as marketplaces—companies that act as a facilitator between buyers and sellers by providing a technology platform, but not inventory-based models, where the company owns the goods that are being sold through its platform. Hence the latest deal shouldn’t be seen as a permission to sell Walmart’s own-brand labels in India. Even now, 95% of what Walmart sells in India via its cash-and-carry shops is procured locally. Further, following the deal, Walmart has said it will work with local small-scale manufacturers and partner with “kirana” (small corner shops) owners and members to help modernise their retail practices and adopt digital payment technologies.
Yet another concern is that the playing field isn’t level for brick-and-mortar multibrand retailers as the government’s narrative has been to discourage foreign direct investment in this sector. Even though the previous Manmohan Singh government allowed 51% FDI in multibrand retail, the scheme has remained a nonstarter under the Modi government as it is seen as hurting the government’s vote bank of local “kirana” traders.
Protesters are concerned that predatory pricing and steep discounting by e-commerce firms with deep pockets such as Amazon and Walmart could edge out smaller rivals and local multibrand retailers. The government has already taken action on this score prohibiting marketplaces from offering discounts and capping total sales originating from a group company or one vendor at 25% even though critics argue that there are ways around this.
Moreover, some suppliers may be squeezed as Walmart and Amazon would have greater negotiating power over them but at the end of the day consumers would benefit from increased competition in the retail space. It’s time to let go of nationalist rhetoric and focus on the positives of increased foreign investment on jobs growth, improved cold-storage technology and lower prices. With the manufacturing sector languishing, a lot rests on the e-commerce and the retail sector to propel the country forward.
Indrani Dattagupta is a UK-based business journalist and has previously worked for The Economic Times and The Wall Street Journal.