If I were the senior management of Walmart, I would be feeling enraged right now for being duped by a craven and opportunistic BJP government in India. Demolished in the local elections -- which was an important litmus test for the upcoming national polls in 3 months' time -- the BJP decided to suddenly, without warning, enforce a fuzzy e-commerce policy that has effectively dismantled the business models of Amazon and Walmart-owned Flipkart, throwing the e-commerce sector into utter chaos.
The online retail market in India has more than tripled since 2015, but it is only expected to contribute to 2.9 percent of the total retail sales in 2018. While this has undeniably resulted in the deterioration of Indian retail, the primary issue with the new e-commerce policy has been in its timing and the nature of the government's diktat that seeks to assuage the legitimate fears of a large vote bank made up of small traders and shopkeepers that is in question.
The markets -- and shareholders -- predictably didn't like these turn of events one bit. Amazon's shares fell by 5.4 percent, wiping out over $45 billion in market cap, while Walmart's shares fell by 2 percent with a loss of $5.7 billion. Yet it is the now-damaged growth rates and loss estimates that are causing the most concern. Emerging reports suggest that both companies have seen a third of their sales volumes vanish into thin air since the new policy came into effect on February 1.
Amazon reportedly took down at least 25 percent of its products from its website. JP Morgan said the company's previous 2020 revenue estimates for India of $7.3 billion could fall all the way down to $5.3 billion. Walmart could see an additional $280 million of losses from Flipkart because of the recent fiasco and this could conceivably rise further.
As such, Morgan Stanley in a recent report titled Assessing Flipkart Risk to WMT EPS suggested that "an exit is likely not completely out of the question with the India e-commerce market becoming more complicated", according to the Economic Times. The report drew many parallels between the current situation with a previous exit from two years ago, referring to Amazon's retreat from China in late 2017 after it saw that the business model used was no long viable.
Anindya Ghose, the Heinz Riehl professor of business at New York University told Quartz: "Walmart and Amazon will feel more than a pinch. It is not a big stretch of imagination to understand why Walmart may want to back out of the Flipkart deal."
The hard truth is that Flipkart, which gets 50 percent of its revenue from smartphones sold through what have, so far, been ultra-popular, exclusive deals, will no longer be able to use these channels of sales.
While that portends a looming disaster of unknown proportions for Amazon and Flipkart, for now, the biggest hits to their bottomlines are taking place in the compliance department. Lawyers and senior management at Amazon and Flipkart are working furiously to determine what they can actually sell under the new restrictions, as well as from whom they can source these products.
It's an epic undertaking. No longer will the two companies be able to sell anything sourced from an entity that provides them with goods amounting to more than 25 percent of their sales. Additionally, neither of these two e-commerce giants can hold any equity stake in an outfit that sells goods on their sites. Both companies were widely seen to have consistently ignored these two rules, ably aided by the Indian government who did nothing for two entire years. Until, of course, the recent December 'Note' that has sent Amazon and Flipkart into a tailspin.
Now, both companies face the gargantuan headache -- nevermind the cost -- of identifying new sellers to fill up the shortfall and training them appropriately. It is no wonder then, that Morgan Stanley has estimated a 10-70 percent slowdown in the 30 percent growth rate that was supposed to propel the industry from $30 billion today, to $200 billion by 2026.
Of course, Walmart predictably provided a sanguine outlook in reaction to these events: "Despite the recent changes in regulations, we remain optimistic about the e-commerce opportunity in India given the size of the market, the low penetration of e-commerce in the retail channel and the pace at which it is growing…" it said to the Economic Times. Even Morgan Stanley admitted in its initially bleak-sounding note that "we do not think Walmart will step away from India. We think Walmart will conform to the new regulations and try to determine a strategy to reach profitability over time."
Negotiating the fickle political and policy landscape of India is not something new for Walmart, which has been entrenched in the country since 2007 and survived previous unfavourable policy shifts to emerge as a successful and profitable wholesale business. However, if the company decides to move on from Flipkart, it will be in a fire-sale that leaves it bleeding profusely -- no one in their right mind would buy the firm at cost considering the current rules.
Walmart will just have to slog it out for the long haul and hope for better days and fewer competitors to turn its rapidly souring investment into something more palatable.