Flipkart (and Bansals) could have been India's Alibaba (and Jack Ma)
Walmart has paid $16bn for a majority stake (77%) in Flipkart, India's biggest online retailer, making this the world's largest ever e-commerce acquisition. There are many good things about the acquisition, both for Walmart and Flipkart.
Wall Street gave thumbs down for the world's biggest e-commerce deal. Walmart's stock crashed 4% during the day. They felt WMT overpaid for the company that's going to suck a lot of cash. I am sure Walmart is thinking that the acquisition gives Walmart ammunition to begin its first real battle with Amazon in the emerging markets. So they are valuing Flipkart at $20bn and paying $16bn for 77% stake. For Flipkart, it's a good valuation at this stage. Is it going to be good for Walmart? Just as the Wall Street, I have my doubts. First of all, Flipkart is losing its battle to Amazon in India. I am not sure if Walmart can add smarts to turn the table around. Yes, it will add much-needed capital, experience in online groceries and food supply chain. Walmart's executives are of the opinion that the value added to Walmart is in them learning from Flipkart. But Walmart has already acquired Jet.com for $3.3bn in 2016. But I am more interested in looking at this deal from Flipkart's and India's point of view.
Considering that Flipkart was running out of cash while slugging it out with Amazon for grabbing the pie of the modest Indian e-commerce market, this seems like a very good deal for Flipkart at this stage. The founder and investors got a good (profitable) exit. Accel Partners and Tiger Global's initial investment got them 400x. Softbank would get 1.5x for $2.5bn within a year. By all standards, Flipkart and Bansals have been a success beyond any Indian's dream. They are super!
But I didn't like this acquisition for a very different reason. Yes, Flipkart came out a winner out of the losing battle. But would they have managed better and stayed independent and grown themselves to be a global e-commerce giant? More like Alibaba. For me, it's a missed opportunity for Indian grown founders to be India's Jack Ma and Flipkart to be India's Alibaba. Yes, Sachin can yet create new organizations which could lead him there. But with Flipkart, they had golden opportunity to make Indians feel even more proud and confident. I would have been very happy to see an Indian grown startup getting to $200B valuation. Maybe they could have done even better to navigate through this troubled patch and come out competing with Amazon and Alibaba at a global stage.
Could they have become $200 B business on their own, with the original team?
In terms of the capital infusion needed, they wouldn't have any problems. Flipkart, founded in 2007 by Sachin Bansal and Binny Bansal, is India's biggest e-commerce company and has had high-profile investors including Microsoft, Tencent and Softbank. The last name there was good enough to provide the fuel for growth. The other two names are not bad either.
Would Indian market alone have supported the kind of growth Alibaba experienced/ing?
Alibaba's revenue is about $36bn but its market cap is whooping 13.8x of its revenue at about $500bn. This is because Chinese e-commerce market is double that of the US's and is growing at double the rate of the US's. Amazon's revenue is $177bn with market cap of $777bn. Flipkart's revenue is around $3.1bn and its valued at $20bn now. India's e-commerce market is just 2% of China's.
The numbers show that there is a big headroom for Flipkart to grow multifold. Of course, Flipkart is not expected to be profitable for some years. Its revenue growth has slowed down. Yes, India's middle class is not yet large, wealthy and tech-savvy as the Chinese counterpart. The Indian e-commerce market is small by global standards - 100 million customers in a country with about 1.3 billion people. But it's not impossible to reach the revenue figures with duopoly (with Amazon) in India. But Flipkart could have done better to manage its cost base well to stay afloat with much lesser funding for over a decade more. That will help them catch the next wave of upswing powered by increased online spend by Indians. India's e-commerce market is about $38bn in 2017. It is expected to grow up to $200 billion over next decade.
Retail e-commerce sales in 2017 in India is yet tiny compared to China:
- China: $1,115B
- The US: $455B
- The UK: $113B
- Japan: $95B
- Germany: $65B
- South Korea: 56B
- France: $49B
- Canada: $34B
- Australia: $21B
- India: $21B
China! The whooping e-commerce sales in China is double that of the US. I am sure most of you would have been surprised to see that China's e-commerce spend is more than the US. And that it's more than twice that of the US is mind-boggling. The reasons for that ... that's a topic of a separate blog altogether. The growth is fueled by mobile apps and improving logistics networks, which have helped e-commerce companies reach new customers in smaller cities in China. Read my blog http://sam33r.com/home/alipay for some more information on this.
All I can say here is that there is a big headroom for India to grow. India needs huge investment in infrastructure.
Even more mind-boggling is the rate of growth of Chinese e-commerce market. At that huge base, they are yet the fastest growing e-commerce market in the world. Here are the growth rate comparisons:
- China: 165%
- Argentina: 153%
- India: 141%
- Indonesia: 120%
- Canada: 109%
- Mexico: 106%
- The Philippines: 94%
- Thailand: 92%
- Malaysia: 89%
- Russia: 87%
- Vietnam: 75%
- The US: 73%
Why an Indian-owned $200 B Flipkart would have been better for India:
It would have done so much for the confidence of the budding generation.
Could any of the existing Indian retailers muster the funding to acquire Flipkart?
- DMart = USD 13 billion
- Future Retail = USD 4 billion
- Trent (Tata Group) = USD 1.6 billion
- Shoppers Stop = USD 0.7 billion
The Flipkart valuation is just below all the above top retailers (offline) put together. Well, I am not sure if any of them had the skill sets to make it a success. Ummm, DMart might be the only one who is on a good trajectory. So they might be the one who may have done it (the acquisition and the mindset). Future groups' founder, Kishore Biyani, has openly expressed his doubts over the longevity of e-commerce's sustainability. Tata group and Shoppers' retail business is just not big enough and, more importantly, they may not have the right mindset to manage the business.
How did Amazon and Alibaba sailed through, and not Flipkart?
Till about a couple of years back I almost exclusively shopped on Flipkart. There was no room for complaints. They delivered in time. They replaced my phone with no hassles - good customer service, good discounts and enough spread. But Amazon started their push around IPL (a two-month long cricketing event in India where best of the players around the world come and compete. It's cricket worlds Eglish Premier League or Super Bowl) season. With Kindle, Amazon Prime, Amazon Drive, Amazon Video - there was just no competition. I made my switch for good. I exclusively buy on Amazon now. Flipkart felt pale in comparison. (I've never shopped on India's #3 Snapdeal.). Paytm could be a worthy rival. I use their paymnet wallet extensively. But they haven't yet given me strong enough reason (except heavy discounts) to move away from Amazon.
Flipkart failed to turn into profit. Even the mighty Walmart reported that their earnings would see 5-11% decline over next two year due to Flipkart's. Amazon is profitable, with all its businesses put together. AWS is a big reason why they are profitable today. They have good cash on hand to go into newer markets.
Alibaba generates consolidated operating margins north of 30% while Amazon struggles to break single-digits but because of differences in business model and accounting treatment, comparing these two figures is essentially meaningless.Alibaba’s e-commerce business actually generates significantly more cashflow for shareholders due to greater scale and higher market share in its core market.
Amazon’s approach is to bring Walmart’s scale cost savings online. “Amazon’s approach in the United States was essentially to move the “Walmart economy” online, creating a large retailer based on a high-volume, low-cost model that relied on massive scale and technology to create cost savings,” explains Porter Erisman, author of Six Billion Shoppers (New York: St. Martin’s Press, 2017). And it passed them on to consumers at razor-thin margins. Alibaba’s approach to e-commerce is similar to eBay’s model. “Ebay’s approach was to move the yard sale economy, online, creating a market for used goods and collectibles. Alibaba’s model charges no listing fees and has no warehouses to maintain inventories, making it very likely to be copied by others—much easier than Amazon’s model.
Walmart's better than Amazon, for Indian consumers
Well, I am at least happy that Flipkart didn't land in Amazon's hands. That would have been bad for me as a consumer. Together, Amazon and Flipkart, amount for 90% of e-commerce market share. Well, the regulators wouldn't have allowed it anyway #AntiTrust. I hope Walmart has figured out a way to tackle India tax and regulatory regime. India's regulatory and statutory compliances are one of the most complex in the world. May be only Brazil and Argentina has more complex systems. Vodafone has burnt its fingers in India. Tax treaty benefits, withholding tax obligation, capital gains tax etc. It's going to get complecated. One thing is for sure that lawyers and tax consultants are going to make a lot of money.
The General Corporate, Competition Law, Banking and Finance, IPR and Tax Practices of Shardul Amarchand Mangaldas advised on the transaction. Others advisors to the transaction were J.P. Morgan Securities LLC and Barclays (financial advisor for Walmart); Hogan Lovells, and Gibson, Dunn and Crutcher LLP (outside counsel to Walmart) Goldman Sachs and Co. LLC (exclusive financial advisor to Flipkart); Gunderson Dettmer LLP, Khaitan and Co., Allen and Gledhill LLP and Dentons Rodyk and Davidson LLP (legal counsel to Flipkart),
... Now I look forward to Paytm, Ola and MakeMyTrip to carry the baton to create $500B Indian company!