Walmart Inc. WMT finally announced on Wednesday that it will be acquiring a substantial stake in India's e-commerce giant Flipkart. This is likely the smartest move that Walmart has made in recent times. Flipkart will give Walmart the much-required strength Walmart needs to explore the highly coveted India market.
Understandably, Walmart's decision is powered by the intent to compete with e-commerce giant Amazon.com, Inc. AMZN , which has established itself already in the targeted emerging market. That said, despite this big-ticket acquisition, Walmart's shares took a hit on Wednesday, declining as much as 3.1%. However, it is too early to rule out Walmart given that the Flipkart acquisition will only add to its strengths.
Walmart's Boldest Move
Walmart has agreed to pay $16 billion for a 77% stake in Flipkart, making it the company's biggest deal ever. This gives Walmart a chance to capture the growing e-commerce market in India. After all, Flipkart is the one of the most successful e-commerce startups over there.
Acquiring Flipkart will give Walmart a second chance in India. The retail behemoth has struggled to penetrate the India's retail market worth $670 billion, despite making its debut 11 years ago. Walmart has a meager 21 wholesale stores in India, and no e-commerce presence. Also, Walmart's joint venture with Bharti Enterprises of a 50:50 partnership to run the wholesale cash-and-carry business turned sour a few years ago.
Understandably, the e-commerce route to tap the India market seems to be the best bet for Walmart. For more than a decade now, different governments in India have denied permission to the likes of Walmart to set up stores in that country. Walmart has a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Finally, when permission was granted in 2012, it came with conditions that foreign investors could do business in India only in partnership with that country's retailers. At the same time, Walmart too could not have opened its own e-commerce wing as foreign investment as online retailing isn't allowed in India. Hence, acquiring an existing business was the best option.
How Filpkart Can Turn Walmart's Fortunes
Flipkart is India's own Amazon being that country's biggest e-commerce company. Amazon, on the other hand is the second largest. Moreover, one of the biggest reasons behind Flipkart's success has been its cash on delivery model of business, a feature that has struck a chord with shoppers. Understandably, Walmart will try to cash in on this quotient.
At the same time, this will give Walmart a level playing ground with its biggest competitor Amazon. Jeff Bezos' company has in the last few years changed the entire retail landscape and is clearly ahead of other retail giants like Walmart, Target Corporation TGT Dollar General DG and Dollar Tree DLTR in the e-commerce race.
Wait and Watch Game
Walmart's shares slipped 3.1% following news of the Flipkart acquisition. However, the fall isn't because investors don't have faith in the stock. Rather, it occurred because Walmart said that the deal could cut into its projected earnings per share of $0.25-$0.30 in the current fiscal year and around $0.60 in the next fiscal. The company also indicated that it anticipates Flipkart's operating loss in 2017 to almost double this year.
This might have dented investor's confidence to some extent as they have long known that such a decision was in the coming. Moreover, Flipkart holds 30% of India's e-commerce market. In fact, investors reacted in similar fashion when Walmart in 2016 acquired Jet.com for $3.3 billion. However, the acquisition turned out to be Walmart's biggest weapon to compete with Amazon, thus proving to be one of its most successful deals.
Walmart's decision to acquire a majority stake in Flipkart undoubtedly is a bold move and perhaps the best possible way to say in the race. The deal definitely gives the company a second chance to tap the Indian market. Moreover, given the strict operating rules for retailers in India, the Flipkart acquisition looks the best and timeliest for Walmart to stay ahead in the highly competitive retail space.
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