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Walmart’s Entry into Indian Online Retail via Flipkart Acquisition “I am confident that this is one of the best decisions our company has made – we believe in India, have seen growth in India in every way. This is the best place to be anywhere in the world.”1 – Doug McMillon, Walmart’s President and CEO, May 2018 “This investment is of immense importance for India and will help fuel our ambition to deepen our connection with buyers and sellers and to create the next wave of retail in India. Walmart is the ideal partner for the next phase of our journey, and we look forward to working together in the years ahead to bring our strengths and learnings in retail and ecommerce to the fore.”2 – Binny Bansal, Flipkart’s Co-Founder and Group CEO, May 2018 On May 9, 2018, Doug McMillon (McMillon), President and Chief Executive Officer of Walmart Inc. (Walmart), announced Walmart’s largest-ever acquisition deal – buying a 77% stake in Flipkart, the leading online retail marketplace in India, for US$16 billion.3 McMillion said, “India is one of the most attractive retail markets in the world, given its size and growth rate, and our investment is an opportunity to partner with the company that is leading transformation of ecommerce in the market.”4 The acquisition of Flipkart helped Walmart not only to enter the Indian online retail space but also to compete with its rival Amazon in one of the largest and the fastest growing online retail markets in the world. Additionally, the deal would ensure the longterm growth of the company, experts opined. Walmart, a late entrant into the online retail space, had been on an acquisition spree since August 2016, acquiring one online retail store after another to expand its online retail business. The Flipkart acquisition was an extension of Walmart’s strategy to grow its online retail business as online retail was expanding around the world thanks to the development of various technologies. 1

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“Walmart CEO Doug McMillon Addresses Flipkart Staff; Says Deal among Best Decisions,” https://economictimes.indiatimes.com, May 9, 2018. “Walmart Buys Flipkart, Finally: US Giant Picks Up 77% Stake in Indian e-Tailer For $16 Billion: 5 Key Things,” www.financialexpress.com, May 9, 2018. “Walmart to Invest in Flipkart Group, India’s Innovative eCommerce Company,” www.wal-martindia.in, May 9, 2018. Prashun Talukdar, “Walmart Buys 77% Stake in Flipkart: 10 Things to Know,” https://timesofindia.indiatimes.com, May 9, 2018.

This case study was written by Manish Agarwal (IBS Hyderabad) and Aruna Polisetty (Gitam Institute of Management). It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. © 2018, IBSCDC. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.

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Where Flipkart was concerned, this deal would help it secure long-term funding to finance its expansion and deep discounting strategy to compete with Amazon. It would also help Flipkart to adopt Walmart’s global expertise in warehousing operations, omnichannel sales, logistics management, operation and supply chain management, and back-end technology among others. Economists believed that the deal would not only help the two companies but would prove beneficial India as a whole. The deal would help to improve the logistic services in India and reduce supply chain costs. McMillon said the deal would create 10 million direct and indirect jobs in India through improved logistics and commercial opportunities, and promised to promote India’s national initiatives.5 In a statement Walmart said, “As Walmart scales in India, the company will continue to partner to create sustained economic growth across agriculture, food and retail. Future investments will support national initiatives and will bring sustainable benefits to the country.”6 However, many Indian small traders opposed the deal. The Confederation of All India Traders (CAIT) filed a petition with the Competition Commission of India (CCI) against the deal. They said the deal would create unfair competition and impact small traders on the offline platform.7 Experts stated that given the complex organizational structure and differences in work culture between the two companies, getting benefits out of the deal might become either impossible or take longer than expected time. McMillon accepted that the deal hurt the short-term perspective of the company and synergies and scale would come only in the mid- to long term when losses dropped and returns improved. Now, Walmart had to develop strategies to manage Flipkart’s losses arising from the latter’s discount strategy and stand up to the stiff competition from Amazon in the Indian market. Also, it remained to be seen how well Walmart’s strategies would help keep Flipkart at the number one position in the Indian eRetail space.

INDIAN ONLINE RETAIL (eRETAIL) INDUSTRY The Indian retail industry was valued at about Rs.8 49 trillion in 2016-17. It was divided into organized and unorganized retail. The organized retail in India was worth Rs. 3.5 trillion, which was about 7% of the overall retail industry in India. The online retail industry (eRetail) was worth Rs. 700 billion, which was 20% of the organized retail industry in India in 2016-17 (Refer to Exhibit I for comparative picture of Indian Retail Market).9 The Indian eRetail industry players mostly followed an inventory-based model10 or a non-inventory-based model also known as the marketplace model11. The players that followed the inventory-based model were Jabong.com12,

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Rajeev Dubey, “Flipkart Deal to Create 10 Million Jobs in India, says Walmart CEO Doug McMillon,” www.businesstoday.in, May 10, 2018.

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“Walmart to Invest in Flipkart Group, India’s Innovative eCommerce Company,” https://news.walmart. com. “CAIT Files Petition in CCI against Walmart-Flipkart Deal,” https://economictimes.indiatimes.com, May 28, 2018. Rs. is the symbol of the Indian currency, the Indian Rupee. As of July 2018, US$1 was approximately equal to Rs. 68. “E-retail Market Size to Rise 2.5x in 3 years,” www.crisil.com, February 2018. In the inventory-based model, the website operator keeps an inventory of products apart from doing other things such as customer support, marketing, logistic, payment processing, etc.

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In the marketplace model, the inventory is provided by various third parties (retailers or wholesalers) and the marketplace operator takes care of the transaction process, customer support, marketing logistics, etc. In India, this model helps to get around Foreign Exchange Management Act (FEMA) regulations which forbid foreign retailers from owning an Indian company for direct sales to retail customers.

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In 2014, Jabong was one of the players in the Indian online fashion industry.

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Walmart’s Entry into Indian Online Retail via Flipkart Acquisition

319-0040-1 Walmart’s Entry into Indian Online Retail via Flipkart Acquisition

The IAMA16-KPMG17 report “e-Commerce: Rhetoric, Reality and Opportunity”, published in September 2013, stated that India had more than 137 million internet users, 25 million of whom were online buyers.18 These figures were far lower than those for the US, China, Sri Lanka, and Australia. In India, only 18% of internet users were online buyers whereas in the US this percentage was as high as 64%. In neighboring Sir Lanka, 63% of the internet users were online buyers (Refer to Exhibit II for trend in e-Commerce in India and other Countries). According to industry experts, earlier, a major section of internet users logged in from metro cities in India. However, the trend was changing and the number of internet users logging in from tier-2 and tier-3 cities was increasing rapidly. There were a large number of people accessing the internet through their mobile phones and this trend was expected to continue and overtake the number of people accessing the internet through personal computers. There were 481 million internet users in December 2017 and this number was expected to increase to 829 million by 2021.19 (Refer to Exhibit III for Internet users as a percentage of total population in India) In 2017, the top two players – Flipkart and Amazon – held more than 60% of the Indian eRetail market (Refer to Exhibit IV for e-commerce market share of leading players). Some of the major segments of the Indian eRetail industry were electronic, apparel, beauty care, personal care, and books. In 2018, the major challenges for the industry were the small size of purchase, low conversion rate, poor penetration of banking services which led to fewer debit and credit card users, majority of the online shoppers preferring to use cash on delivery (COD) as the payment option — which worked out costlier for the e-tailer 20, a huge number of COD users refusing to accept the product on delivery, poor last mile connectivity which obstructed the quick movement of delivery, regulatory issues21, etc. However, a growing number of smartphone users, the youngest population in the world, and growing disposable incomes were some of the advantageous factors for the Indian ecommerce industry. In February 2018, CRISIL Research22 reported that the market was growing at a CAGR of 35-40% and would touch ~US$1.8 trillion by 2020.23 Online retail was also expected to be about 5% of the total retail industry (offline plus online retail) of India by 2020.24 The major growth drivers would be concentrated funding and geographical diversification among others. Food and grocery would be the next big segment in eRetail after apparel, mobile phone.

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FirstCry.com is an India-based website which sells products for new mothers and babies. Snapdeal is one of the leading players in the Indian online retail industry. Amazon.in is the Indian website of Amazon.com, the largest online retailer in the world. The Internet and Mobile Association of India (IAMAI), established in 2004 by online publishers, is a professional industry body which represents the online and mobile VAS industry in India. KPMG is one of the big four auditors. It is a worldwide professional service provider. “Ecommerce Rivals Put up Joint Fight over GST Clause,” www.rediff.com, February 10, 2017. “Indian Ecommerce Industry Analysis,” www.ibef.org, January, 2018. COD costs around Rs. 35 to 65 extra for e-tailers. Some other disadvantages of COD are risk of fraud, added complexity of the supply chain, high lead time, and locking up of working capital. FDI cap on ownership. CRISIL Research is an integrated research house based in Mumbai, India. “E-retail Market Size to Rise 2.5x in 3 years,” www.crisil.com, February 2018. “IBEF, E-commerce,” www.ibef.org, January 2018.

Purchased for use on the MSc Human Resources and Organisations, at London School of Economics & Political Science (LSE), Department of Management. Taught by Elaine Yerby, from 30-Apr-2021 to 30-Oct-2021. Order ref F414794. Usage permitted only within these parameters otherwise contact [email protected]

Firstcry.com13 (both online retailers) among others while the players that followed the noninventory-based model were Flipkart.com, Snapdeal.com14, and Amazon.in15 (all marketplaces), among others.

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WALMART: GLOBAL LEADER IN OFFLINE RETAIL

Walmart was one of the best examples of a successful retailer that had survived in international markets through expansion. Walmart was successful as a retailer in the United States and used a different set of marketing strategies and entry modes to dominate other markets. This gave it a competitive advantage over other retailers in the market. It had successfully applied its “Every Day Low Price” strategy throughout the world.

WALMART’S ENTRY INTO NEW MARKETS Walmart used different strategies to enter different countries. In 1991, it penetrated the Mexican market through a joint venture with Mexico’s largest domestic player, CIFRA. CIFRA helped Walmart by supplying information on matters such as supplier connections, local market culture, and dealings with local officials. In 2005, Walmart was involved in a bribery scandal, and faced allegations of having bribed Mexican government officials to achieve market dominance. In 1994, Walmart entered the Canadian market with the purchase of 120 Woolco stores.25 Walmart’s low pricing strategies helped the company to sustain itself in the Canadian market. In 1996, Walmart entered China and focused on localization strategies in terms of local procurement and stores management. It also focused on distribution centers. But the supply chain operations of Walmart were not as effective as in its domestic market. By March 2012, Walmart was operating in 370 units in 140 cities of China. Walmart’s China sales touched US$7.5 billion by the end of October 2011 but it faced huge competition from local retailers.26 Moreover, the company failed to understand China’s operational and cultural environment. Walmart also faced legal actions under China’s local and national laws for professed product violations. It failed to make profits and capture the market in China.27 In 1996, Walmart entered into a partnership with Multipolar Corp., a subsidiary of Lippo Group, an Indonesian conglomerate, to enter the Indonesian market. However, it failed to understand the Asian supply chain and also faced legal disputes with Lippo Group, after which it exited the country in 1998. Another failed marketing strategy involved Germany, which Walmart entered in December 1997, with the acquisition of the 21 stores of Wertkauf hypermarket chain.28 Walmart’s aggressive pricing strategies resulted in a loss of US$200 million in 1999. Moreover, Walmart struggled in Germany’s highly regulated and unionized market with strikes and fines followed by public relations challenges and it exited the market in 2006 with pre-tax losses of US$1 billion. 29 Walmart purchased a 6.1% stake in Seiyu, one of the largest supermarket chains in Japan in 2002 to enter the Japanese market.30 In 2008, it raised a 100% stake in Seiyu and Seiyu turned into a full-fledged subsidiary. Walmart, however, struggled to understand the tastes and preferences of Japanese customers. Japan became a struggle for Walmart. 25 26 27

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Andrea Adelson, “Company News; Wal-Mart Entering Canada,” www.nytimes.com, 1994. Peter Cohan, “How Did Wal-Mart Crack Open China?,” www.forbes.com, May 18, 2012. Robert Salomon, “Here’s Why Walmart Stumbled on The Road to China,” http://fortune.com, February 21, 2016. “Company News; Wal-Mart Says It Is Buying Germany’s Wertkauf Stores,” www.nytimes.com, December 19, 1997. “Wal-Mart’s Germany Exit Reflects on Its Market Entry Strategy,” www.gartner.com, August 2, 2006. “Walmart Japan,” https://corporate.walmart.com.

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Walmart was a global retail company founded by Sam Walton in 1962 in Bentonville, Arkansas, US. The company was incorporated on October 31, 1969. The company started as a chain of hypermarkets, discount department stores, and grocery stores around the globe. It worked under three reportable segments – Walmart U.S., Walmart International, and Sam’s Club.

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In 2007, Walmart entered into a joint venture with Bharti Enterprises31 in India to start a cash and carry membership-based business in the B2B segment under the brand name ‘Best Price Modern Wholesale Stores’. The first store came up in Amritsar, Punjab, in May 2009. However, the joint venture did not do well and registered a loss of Rs. 2.77 billion in 2011.32 In 2013, it was dissolved and Walmart purchased Bharti’s 50% stake. Walmart also decided to stop its expansion plans in China, Mexico, Brazil, India, and other countries to fulfill the requirement of the US anti-graft law as the US authorities launched an investigation into probable violations of the Foreign Corrupt Practices Act. In 2015, the company restarted in expansion in India and opened a store in Agra, in northern India. As of 2018, Walmart had 21 wholesale stores in nine states and one fulfillment center in India with more than one million members.33 The company had three entities in India – Walmart Cash & Carry, Walmart Sourcing, and Walmart Technologies. 34 As per the 2018 annual report of the company, Walmart had 11,700 stores in 28 countries and 2.3 million employees around the world. The company served about 270 million customers every week at its stores and on various websites under 65 banners.35 As per the 2018 Fortune 500 list, Walmart was ‘The world’s largest company by revenue’ with revenue of US$500.3 billion for the fiscal year ended on January 31, 2018 (Refer to Exhibit V for Selected Financial Information of Walmart).36

WALMART ENTRY INTO ERETAIL BUSINESS The global retail e-commerce sales increased from US$1.33 trillion in 2014 to US$2.30 trillion in 2017 and were expected to grow to US$4.88 trillion by 2021. The growth was due to various reasons including a sharp increase in the number of internet users worldwide by 82% or 1.7 billion from 2012 to 2017.37 To capture the growth of eRetail, Walmart decided to take the inorganic route to enter the e-commerce market and it made several acquisitions (Refer to Exhibit VI for Walmart’s Acquisitions of ecommerce businesses). It announced its first acquisition in the online space in August 2016 –Jet.com – for US$3.3 billion.38 As a part of the deal with Jet.com, a home furnishings online store – Hayneedle.com – also became part of Walmart. In January 2017, Jet.com acquired ShoeBuy through Walmart, for US$70 million. ShoeBuy was an online footwear store, which had more than 800 brands.39 In February 2017, Walmart acquired Moosejaw, an online retailer with online as well as offline stores, for US$51 million.40 To continue growing in the e-commerce space, Walmart acquired ModCloth, a women’s wear retailer, in March 2017.41 Then, in June 2017, it acquired men’s 31 32 33 34 35

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Bharti Enterprises is one of the leading business group in India. “Why Wal-Mart Bharti Split in India,” www.ndtv.com, October 9, 2013. www.wal-martindia.in. “Walmart-Flipkart: 15 Pointers on India’s Biggest E-commerce Deal,” www.cnbctv18.com, May 9, 2018. “Walmart 2018 Annual Report,” http://s2.q4cdn.com/056532643/files/doc_financials/2018/annual/WMT2018_Annual-Report.pdf. http://fortune.com. Simon Kemp, “The Incred...