Walmart bought Flipkart for $16 billions

Following Morgan Stanley’s projections that India’s e-commerce market to become a $200 billion market by 2027, Walmart makes the $16 billion bet. India is the second largest country in the world with 1.3 billion people, half under the age of 25. Due to this, India will witness an expeditious growth in smartphone users in the near future.

Why Walmart was Interested in Flipkart?

As we all know that India boasts a large and young population. This factor will propel the India’s e-commerce market, pegged at a rodent $38bn in 2017, to mammoth $200bn by 2027. Thus, its an early bird situation and Walmart wants to be the earliest.

Flipkart had net sales of $4.6 billion in its latest fiscal year. That’s a fraction of Walmart’s latest annual revenue of $485.8 billion. But Walmart believes India, which has 1.3 billion people, could be among the world’s top five e-commerce markets within the next five years.

“We are actively working to shape the portfolio of geographies and businesses we’re in, in order to set the company up for success for another generation,” Walmart CEO Doug McMillon said in a conference call Wednesday.

How big is Flipkart?

Founded in 2007 by two college friends and former Amazon employees, Flipkart began life as an online bookseller. The company sold products worth a total of $7.5bn in the financial year that ended in March 2018 – the sales had grown by 50% since the previous year. Its net sales, after discounts, returns and cancellation, were worth $4.6bn.

Amazon, too, made a bid for Flipkart but the merger could have faced severe scrutiny from India’s antitrust regulator as their combined sales would have added up to almost 90% of India’s e-commerce market.

Why is it beneficial for Flipkart?

Flipkart was running out of cash in its battle with Amazon. Both competitors have been “burning cash” in massive sales and discounts pegged to Indian festivals in a bid to acquire more customers.

Amazon runs a profitable business worldwide, thanks to its cloud computing service, and it has the cash to take on newer markets. Flipkart, however, needs the financial strength Walmart offers.

Walmart Stocks crashed

Analysts and investors believed that Walmart overpaid for its stake in Flipkart. This widely-held view led to dropping of Walmart shares to their lowest intraday price since October 2017. The drop was 4% but was enough to wipe $10bn off its market capitalisation.

The reason is that the investors feel that the company won’t make profits in the near future. So, this was the moment for them to bail-out from this risky venture.

How this deal will affect Indian e-Commerce market?

Model of providing heavy discounts were not sustainable in the long run. That’s why Flipkart didn’t make much profit. With the coming of Walmart, this model will definitely change. Walmart can offer its expertise on online groceries and strong food supply chain. Thus, a new dimension would be added in the e-Commerce business in India.

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