​Walmart wants to swallow India's Flipkart to battle Amazon, but SoftBank isn't biting (yet)

Walmart need's SoftBank's go-ahead to invest in Flipkart, but SoftBank will not be keen to exit such a prized investment so early.

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The latest earnings put out report by Walmart is a poignant indicator on why it has been aggressively pursing India's largest (or second largest, depending on whom you believe) e-commerce outfit, Flipkart.

Most worryingly for Walmart, its e-commerce sales have begun declining, thanks to a slowdown in online orders, which is tantamount to death for an old-economy company trying to battle a new-economy retail leviathan that is Amazon. Walmart has been desperately trying to transform its loyal offline shoppers into online ones, because they apparently shell out twice as much and, as the Bloomberg article observes, gravitate toward bigger-ticket items. There are, of course, other obvious benefits toward beefing up its online presence: Reduced rents, working capital, and employee costs to name just a few.

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Therefore, expanding into new e-commerce markets can be key to Walmart's future, but availing of the massive, lip-smacking $366 billion opportunity in China is not really an option -- since Chinese companies like Alibaba, Tmall, and Taobao (launched by entrepreneur Jack Ma), along with Tencent and JD have obliterated all other competition and reduced Amazon, at around 1 percent of the market, into a virtual non-player. If these firms didn't represent an almost impossible barrier to entry, then their captive payment systems (Alipay, WeChat, etc) used widely by Chinese to pay for everything from haircuts to cab rides (and, of course, e-commerce purchases) surely are.

So, the panacea to Walmart's ailments quite clearly is the next big retail game -- India -- where the online market has mushroomed sevenfold to 90 million and is expected to reach 350 million by 2025. Of course, the numbers may seem underwhelming in terms of dollar market size -- $15 billion in 2016 -- but Morgan Stanley expects it to zoom to $200 billion by 2025. And the easiest way to access this goldmine and extend its battle with Amazon on the global stage is by getting in through the backdoor and investing in Flipkart.

There's only one problem and its name is SoftBank. The flagship investment vehicle founded by Japanese businessman Masayoshi Son plopped $2.5 billion last year into Flipkart, including an August 2017 round of $1.4 billion that valued the Indian company at about $14 billion. In total, a consortium of investors that includes SoftBank, Tiger Global, Naspers and Accel Partners hold around 68 percent of Flipkart, with SoftBank's stake valued at 20.8 percent.

With the kind of explosive growth in Indian e-commerce around the bend, the last thing that SoftBank would want is to cash out at such an early stage, and the delay in a deal being forged with Walmart is a clear indication of its reticence. And, yet, SoftBank may need Walmart's desire to pick up a large stake in Flipkart -- the American retailer is said to be interested in a 30- to 40-percent stake -- simply because Amazon has a bottomless war chest and having lost out in China will not let go of the India potential come hell or high water.

Amazon has already earmarked $5 billion for the country in just two years versus the $6 billion that Flipkart has raised since its inception in 2007. Bezos has reportedly told his lieutenants to go for broke here and all indications so far look like this is no idle threat. In just a few years of entering the market, Amazon has run neck-and-neck with Flipkart in terms of sales and has outstripped it in terms of user experience.

Meanwhile, there are other things at work here: Both Walmart and Flipkart are seriously interested in an offline retail chain in India. So is Amazon. The American company has already become a food retailer in the Indian city of Pune and has been approved to invest $500 million in an enterprise that sells locally produced and packaged food items.

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The other big opportunity in India is the grocery market -- third-largest in the world and highly disaggregated. Considering Amazon just scarfed up Whole Foods, and Walmart recently announced a partnership with Japan's Rakuten in online groceries, there will be added incentive for both to get in on this action early in India.

Ultimately, Walmart may have to pare its percentage stake down to a level that SoftBank is comfortable with. Son will most certainly not want to play second fiddle as a minority shareholder. And Walmart, which has long been stymied entry into Indian offline retail by the country's byzantine rules that govern retail trade, may have to compromise by settling for a much lower stake for now in return for a ticket to play.

Previous and related coverage

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