Walmart made a big splash in India this week with its $16 billion (Rs1 lakh crore) acquisition of Flipkart. But the deal is unlikely to get the world’s largest retailer too far in a country that’s still obsessed with its mom-and-pop store culture.
That’s because Walmart has bet on a segment of India’s retail market which, although expected to grow, will continue to remain small. Online retailing currently makes for a minuscule 2% of India’s $670 billion retail market. By 2026, the sector is estimated to grow 13 times to $200 billion, but even then, it will account for only 12% of overall retail in the country.
And capturing a significant part of even that 12% will be a fight for Walmart because it will face stiff competition from deep-pocketed rivals like of Amazon, and Paytm, which is backed by Japan’s Softbank and China’s Alibaba.
Also, it is unclear if Walmart will open up its signature big-box stores in India, if and when government policies are relaxed further. Till then, the retailer can only monetise its e-commerce and cash-and-carry businesses in the country. So, Indian retail giants aren’t too worried about Walmart’s big move, at least for now.
The deal brings about no “significant change for the market,” Kishore Biyani, founder of Future Group, one of the largest retailers in India, told Quartz.
Although Biyani has indicated that he may bring on board a “strategic investor” for his business, the veteran feels his group has a well-diversified business to take on global giants. “We cover the entire retail ecosystem today, from manufacturing, brands, to payments, logistics, stores, and deliveries,” he said. “Why does it (the deal) make any difference?”
India has had several large, homegrown supermarkets and departmental store chains, including Reliance Retail, Aditya Birla, Future Group, and Avenue Supermarts, for years now. Still, unorganised players hold about 90% of the country’s retail market. That’s because consumers in Asia’s third-largest economy prefer shopping at local shops or markets, where standalone stores sell everything from goods of daily use to clothes.
But the prospects for the larger chains have started improving, backed by a shift towards organised retail, better business models, changing demographics, and rising per capita income. Over the last few years, retailers have also shifted their focus from expanding stores to profitability. In the process, they have hived off businesses, lowered debt, and exited unviable assets.
“The Indian organised retail sector has seen a dream run in the past 1.5 years,” analysts at brokerage firm Jefferies said in an April 12 note. India’s retail market, online and offline together, is expected to reach $1 trillion by 2020, according to a 2017 report from industry body Assocham.
However, foreign firms cannot extend their physical presence beyond the wholesale market. Walmart, for instance, operates 21 cash-and-carry stores that service small businesses and mom-and-pop shops. It plans to add another 50 such stores in the next five years.
Walmart, therefore, cannot compete with local retail chains in the physical market—even as it contends with local competition in the online space, aside from the elephant in the room: Amazon.
Offline to online
Over the last four years, physical retailers have stepped up efforts to fight the competition from their online counterparts who, funded by big investors, have swamped the market with hefty discounts and promotions.
To tackle the rising threat, brick-and-mortar retailers have pivoted to an “omni-channel” model, integrating their physical business with an online platform. Some, like Reliance Retail and Tata-owned Trent and Croma, have set up their own online businesses to counter Flipkart and Amazon.
And that’s where the Indian retail market is headed, according to Biyani. “I think the convergence of physical retail is happening. It is a physical retailer buying a digital retailer. So you can imagine the power of physical retail. Going forward there will be one retail channel—omni-channel—and these two ecosystems will work together.”
Retail experts agree. ”The largest part of organised retail is still with brick-and-mortar chains and very formidable ones at that,” said Arvind Singhal, chairman at consulting firm Technopak Advisors. “However, going forward, these retailers could well benefit from a strong omni-channel strategy.”