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Flipkart-Walmart potential deal underpins gap in India's retail market

Indian organized retail's enormous potential has been marred over the years by debilitating FDI policy. Not only did it restrict the international retailers from setting up shop here but also stopped foreign investors to freely invest in Indian companies.

Harminder Sahni        Last Updated: May 8, 2018  | 19:25 IST
Flipkart-Walmart potential deal underpins gap in India's retail market

There isn't any deal in Indian market of the size of the much touted yet to happen deal between Flipkart and Walmart. Not only does it dwarf some of the mega deals in other sectors but also highlights the latent value of the retail businesses in India.

Indian organized retail's enormous potential has been marred over the years by debilitating FDI policy. Not only did it restrict the international retailers from setting up shop here but also stopped foreign investors to freely invest in Indian companies. In this constrained environment the only investors left were the companies that had the wherewithal to invest from the free cash flow from their legacy businesses or had courage to raise expensive debt. Unlike sectors like technology, there was no room for young start-ups to revolutionize the most neglected end of the consumption chain. Thanks to the advent of online retail, some of them were able to bypass policy hurdles and leapfrog. But the offline retail remained shackled to large extent. Even while some welcome policy changes were implemented over years, it had already bled many players and had discouraged lots of others from considering it as an investment option. However, over the years everyone realized that online retail needs offline presence to compliment each other and serve the consumers comprehensively and delightfully. Indian consumption levels are still at extremely low levels across all segments and penetration of brands is even lower. While online can increase the reach it still has a limited power to introduce new concepts, products and brands to millions of first time consumers. Offline retail has a major role to play in this space.

I am really confident that Indian companies and entrepreneurs are capable to creating and growing very large successful businesses using their native intelligence and perseverance. However, I also believe that they will do the same much faster and much better in a competitive environment wherein world's best companies are allowed to operate. Try to imagine Flipkart in the absence of Amazon in India. I am very certain that they would not have been as good as they are without having the constant fear of being overrun by Amazon.

In this context, merger of Flipkart and Walmart is going to change the dynamics of complete retail sector including online or offline. As a company, the investment will impact Flipkart, both strategic as well as tactical manner. The focus will move from doing things to keep attracting more investment periodically to build a sustainable business for the long term. The discussions at management level will move from fund raising and IPO to operational efficiencies and sustainability. Another major change will be that Founders will have no role to play and the company will become 100 per cent professionally managed. That should bring in different level of objectivity and governance.

Walmart is world's largest retailer with deep expertise in managing complex retail business with a decade long experience in Indian market. It will bring best practices honed over decades along with serious patient capital and ambition to capture the market. I believe that Walmart, while planning to buy out 75 per cent of the company, will probably use most of the fresh capital into building back-end infrastructure like warehouses, technology and delivery solutions that will help in increasing reach and consumer satisfaction. Flipkart on the other hand has not only learned but has also created rules of the online retail world. Their combined prowess will not only force Amazon to up its game, it will also push Reliance to bring forth its offline retail and Jio's online power together sooner than later.

I am expecting some real innovations and path breaking ideas to emerge from this battle of three biggies - Amazon, Walmart plus Flipkart and Reliance/Jio. I won't hazard a guess on who will win this battle but Indian manufacturers, brands and of course consumers will be winning everyday from this battle.

The writer is Founder at Wazir Advisors

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