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Last Updated : Feb 07, 2019 05:02 PM IST | Source: Moneycontrol.com

Comment | Walmart can’t just exit Flipkart investment, even if it wants to

Selling Flipkart at a discount would hurt Walmart’s global shareholders. Even then, it won’t find a foreign buyer due to new ecommerce norms. An Indian buyer, if there is one, will like it dirt cheap.

Sounak Mitra @sounakmitra

Sounak Mitra

Earlier this week, the Economic Times reported, quoting Morgan Stanley, that Walmart may consider exiting Flipkart thanks to the government’s latest ecommerce norms that bars online retailers from operating an inventory-led model.  Flipkart CEO Kalyan Krishnamurthy refuted the report in an internal communication to employees.

Without getting into the argument of whether Walmart is seriously considering exiting its largest acquisition so far or not, let’s try to understand why the world’s largest retailer would contemplate such a move. Theoretically, it can exit, but it makes no sense.

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There are three key reasons why.

First, Walmart paid a huge $16 billion (around Rs 1 trillion) to buy 77 percent of Flipkart in May 2018 amid protests from millions of small traders across the country. It would be silly to assume that Walmart concluded its largest acquisition without thinking of all possible, even hypothetical, scenarios that it may have to deal with. In any case, India isn’t a new market for Walmart. It has been dealing with unfavourable regulations since 2007. It went through different cycles, partnered with local companies and even changed partners for its wholesale business. Now the wholesale business is profitable too.

Second, if Walmart decided to exit now, it’ll have to say goodbye at a loss. Flipkart’s value has drastically dropped after the new ecommerce norms were enforced. Morgan Stanley estimates that Flipkart’s losses may widen by 20-25 percent following these new rules. A huge negative impact on Walmart’s global balance sheet will make its shareholders unhappy.

Third, even if Walmart gets to a desperate situation when it is left with no option but exit Flipkart investment, who will buy it?

The reality is, Walmart will have a tough time finding a buyer. No foreign retail firm, or investor, will bite. That’s because, Flipkart’s scope for growth has been curtailed with the new ecommerce norms as long it is owned by foreign companies.

The only option for Walmart would be then to find an Indian company to buy Flipkart. That won’t be easy too. First, there are not many of them who could pay that much money for an acquisition. Second, those who have money may not be interested to get into a business that is known for burning cash. Third, those who have the ambition of making it big in ecommerce have already established a sizeable presence.

Morgan Stanley cited Amazon’s decision  in 2018 to exit China realising its struggle to deal with local policies to argue that Walmart may exit Flipkart. But Amazon and Walmart are different animals.

Walmart has always operated in a different style and opted for a long-term stay. Walmart entered China in 1996 and been fighting against odds since then. But it did not leave. It’s unlikely that India would be different because of the same reason that made Walmart stay in China – untapped opportunity. As India Brand Equity Foundation projected, India’s ecommerce sector is likely to cross $200 billion revenue by 2026, from $38 billion in 2017.

Even Amazon is trying out ways to stay. It has reportedly restructured Cloudtail’s shareholding by bringing down its equity participation to 24 percent. With this Cloudtail ceases to be a group company of Amazon and it may be allowed to continue as a seller on Amazon and other ecommerce market places. But, it does not completely resolve the issue.

The notification (Press Note 2) states in Clause V that “an entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.” As Amazon still holds 24 percent in Cloudtail, it may not pass the bar. However, Cloudtail can operate as a seller on other ecommerce marketplaces.

If Walmart hopes to follow the Amazon theory, it may not have much leverage. In any case, the final ecommerce policy is yet to be released. For now, it will be wait and watch for both companies.

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First Published on Feb 7, 2019 05:02 pm
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