Soon after Walmart announced its $16 billion (Rs1 lakh crore) acquisition of Flipkart, its shares tanked in early hours of trading on the New York Stock Exchange (NYSE). Investors feared that a loss-making Flipkart would dent Walmart’s earnings.
Walmart admitted that this deal would pinch in the near-term, but the world’s largest retailer is confident that Flipkart is the right long-term bet.
On a call with analysts on May 09, Walmart’s management team made a case for its play in India’s e-commerce market, which is expected to touch $200 billion by 2026. Walmart CEO Doug McMillon and COO Judith McKenna stressed on three main reasons: Flipkart’s leadership in some lucrative segments, its payments platform, and the company’s talent pool.
Flipkart’s business
Despite the stiff competition that Flipkart has faced from its deep-pocketed American rival Amazon, the homegrown company has held its ground and managed to become a leader in the lucrative online fashion and lifestyle category.
In other large categories, such as electronics and mobile phones, Flipkart and Amazon are almost neck-to-neck, but the Bengaluru-headquartered firm is a clear leader with a 70% market share when it comes to apparel and accessories.
This is down to some bold bets that Flipkart made over the last four years. In 2014, it bought online retailer Myntra, and then got Myntra to buy fashion e-retailer Jabong in 2016. Flipkart’s own fashion business is also robust, backed by the launch of private labels and low-priced clothing.
Although the size of India’s online fashion market is currently small, it is expected to grow to between $12 billion and $14 billion by 2020, according to estimates by consulting firm BCG. And Walmart realises that it is sitting on a gold mine.
“Myntra and Jabong come together to form a fast-growing fashion e-commerce platform, this is an important category to win in and a positive one when it comes to margin mix and we believe this piece of the company is positioned well with India’s growing middle class and young population,” McMillon said on the call.
Payments
PhonePe, the digital payments startup that Flipkart acquired in 2016, also attracted repeated compliments from Walmart’s leadership team. “It is an important piece of the puzzle to build the entire e-commerce ecosystem,” McMillon insisted.
PhonePe, which works with the Indian government’s popular unified payments interface (UPI), helps users transfer money directly from bank accounts without maintaining an e-wallet. Besides enabling e-commerce transactions and mobile recharges, it also works with small merchants and retailers across India for facilitating payments.
When it bought PhonePe, Flipkart had said the acquisition would help it solve “one of the biggest hurdles for mass adoption of online shopping in India.” So far, the acquisition has paid off, as PhonePe is registering phenomenal growth. In April, the total amount of money transferred through the PhonePe app stood at Rs8,100 crore ($1.18 billion), a jump of 22% from the previous month.
And it’s poised to grow further as digital payments gain momentum in India. In the world’s second-largest smartphone market, digital payments are estimated to touch $1 trillion by 2023, according to financial services company Credit Suisse.
Tech and talent
Walmart’s management also gushed over Flipkart’s talent pool and how it was one of the prime motivations behind the deal.
“Not only do they have an innovative problem-solving culture, they’re doing great work in the AI (artificial intelligence) space, how they’re using data across the platform, particularly payment platform PhonePe,” McKenna, Walmart’s COO, said on the call. “All those things we can learn from and leverage across international markets and the US as well.”
Flipkart has over 30,000 employees, including 8,000 permanent staff that work across functions including technology, seller acquisition, and customer acquisition. The team comprises a hoard of talent that Flipkart has hired from India’s best engineering schools, drawn from other industries within India, and poached from rivals like Amazon. So, with this transaction, Walmart has access to a wide talent pool, likely at a fraction of the cost that American retailer would have to spend to build a similar team in the US.
That said, Flipkart does not have the best track record when it comes to retaining talent. For instance, a couple of years ago, the company hired several highly-priced professionals from Silicon Valley—including Google veteran Punit Soni—who didn’t stick around for too long.
Nonetheless, Flipkart’s team has the experience and expertise of building a world-class e-commerce platform from scratch, which has been pitted against one of the toughest competitors in the industry. And now, they’ve jumped into Walmart’s shopping cart.