Wal-Mart, Flipkart deal talks: $1 bn is a pittance but retail giant may be just testing the waters

India’s retail space dominated by home-grown market leader Flipkart, with Jeff Bezos-founded Amazon following it, is being infused with increased funding if one were to go by news reports that Wal-Mart is pumping in $1 billion into Flipkart.

Wal-Mart, with a market cap of $215.7 billion, earlier made an entry into India through Bharti Enterprises in 2007 and burnt its fingers with India’s still-evolving rules on foreign investment, an internal bribery probe and a faltering partnership, according to Reuters.

Even as the news of a likely Wal-Mart, Flipkart deal is doing the rounds, Amazon too has upped its ante. The Seattle-based company is learnt to be planning to pump in an additional $2 billion into Indian operations, according to this report in the Hindu Business Line. If this materialises, Amazon’s total investment in India will be $7 billion as it has already committed $5 billion.

Some analysts find the $1 billion that Wal-Mart is investing in Flipkart an insignificant amount. What is $1 billion for Flipkart in the times of poor valuation and fund crunch, they ask. “I don’t believe in the news that Wal-Mart will invest $1 billion in Flipkart,” said an analyst, requesting anonymity. “Why would the behemoth invest a ridiculous amount of a mere $1 billion in Flipkart? Wouldn’t it make sense to invest a large sum and buy out a significant stake in the company?”

Be that doubt as it may, the fact that Wal-Mart wants to invest in Flipkart makes sense, say others. For starters, Wal-Mart’s online sales are far behind Amazon. Sanchit Gogia,  Chief Analyst & CEO of Greyhound Research, says “Wal-Mart is finding ways to compete with Amazon in the US and beyond. In order to increase the share of online sales, they are looking for assets that they can build on top of their recent acquisition of Jet.com in the US and the deal with JD.com in China. In India, Wal-Mart is struggling to scale up due to regulations, and investing in Flipkart may give them significant presence in the online retail market," says Gogia.

According to a report by Kotak Institutional equities, Indian e-tailing market could reach $28 billion by 2019-20, registering a compounded annual growth rate of 45 percent over the next four years. Despite the strong growth estimates, gross merchandise value in the June quarter dropped 7 percent to $13 billion as against 21 percent rise to $11.5 billion in the same quarter last year.

A recent Bank of America Merrill Lynch Report pegged Flipkart as the leader with over 43 percent market share. It forecast that in 2019 Flipkart would be able to retain the share at 44 percent, with Amazon gaining 37 percent and Snapdeal’s share falling to just 9 percent. In 2015, Amazon had 21 percent market share and Snapdeal 14 percent.

“However, a $1 billion investment may not solve Flipkart’s problems and this might be a case of negotiating with multiple investors to get the best valuation post the holiday season, on which Flipkart is counting on heavily to gain momentum,”  says Satish Meena, forecast analyst, Forrester.

The sum of $1 billion may seem small, but it could be a case of testing waters, says another analyst. “The Wal-Mart investment in Flipkart should not be viewed purely from a valuation perspective. Wal-Mart may be looking at it as a strategic investment but in the short term,” he says.

If Wal-Mart succeeds with the investment in Flipkart and the beleaguered Indian e-commerce giant is able to make further headway and leave Amazon far behind,  it may increase its stake.

Wal-Mart has been trying to make inroads into online in every country. In India, there is no better way of doing that than through Flipkart, which is the leader in the category, an analyst says.

Ganesh Krishnan, serial entrepreneur and investor says rather cautiously (there is no confirmation on the development from both the companies) that if the media reports of Wal-Mart’s investments are true, then the amount of $1 billion cannot be swiped off aside as a minor amount. On the contrary, it is a significant amount, he reiterates.

“Wal-Mart is testing waters, but it is like the first round of a poker game. You put in a small amount and when you win, you up the stakes in the subsequent rounds. It also makes business sense for Amazon to invest more money in India. The big names currently in the e-commerce space in India have only scratched the surface. However, it is wrong to pit Flipkart with Amazon or with Snapdeal and then look at its investments," says Krishnan.

“This news of Wal-Mart investing in India, if true goes to prove what I have been saying for a long time now – that the e-commece market will be dominated  by serious players only,” says Ankur Bisen, Senior Vice President of the Retail & Consumer Products division at Technopak Advisors. Private equity funds that have stake in Flipkart would want to exit the business at some point in time. That will not be the case with Wal-Mart which may look at that company as a building block to make a strategic move into India, he says.

Wal-Mart and Amazon are competitors in the global arena with the former trailing the latter in the online space. How the Flipkart partnership, if true, will pan out depends on how it is structured. But one thing is for sure: Wal-Mart investing in Flipkart will prove to be an extremely positive move for consumers who deserve a level of service that online companies have so far set standards in India. With its experience and quality of service, technology, Wal-Mart will only further redefine that space.