Retail watchers say Wal-Mart could benefit from rumored Flipkart deal

Here we go again. With multiple media reports suggesting Wal-Mart Stores may make another big ecommerce and buy Indian-based Flipkart, retail industry watchers say the deal would be good for the world’s largest retailer.

Bentonville-based Wal-Mart has moved in recent years to grow its ecommerce business to compete on the world stage with Amazon, Alibaba on other online merchants. Part of that move included the recent $3.3 billion acquisition of Jet.com. It’s the highest price ever paid for an internet retailer, and respected Jet.com CEO and co-founder Marc Lore was included in the deal and will lead Wal-Mart’s ecommerce division.

Bloomberg News reports that Wal-Mart may invest between $750 million and $1 billion in the online startup FlipKart. Wal-Mart nor FlipKart have confirmed the talks are taking place. Even so, the retail world is already considering what a possible deal might mean for the retail giant looking grow its e-commerce business in a country of 1.2 billion consumers.

FlipKart is the brainchild of two former Amazon employees and was launched in 2007. The website sells a variety of products from home goods, food, health & beauty aids, apparel and electronics with approximately 44% of the market share in India. Amazon is knocking on that door with about 30% of the market share.

India has been a tough market for Wal-Mart to crack with respect to physical stores. Last year Walmart International CEO David Cheesewright told Talk Business & Politics that wholesale was the way the retailer planned to go in India. He said it is valuable market long term and the plan at that time was to gradually add more cash and carry stores that service the mom and pop businesses throughout the country.

But that was before Amazon CEO Jeff Bezos announced in June plans to invest $3 billion in India on the heels of $2 billion already spent rolling its Prime service out in the populated country.

Dr. Annibal Sodero, assistant professor of supply chain at the University of Arkansas, said there are several things to consider in trying to assess how Wal-Mart might benefit from a deal with FlipKart.

“First there is the Indian market. It is very important for Wal-Mart, while some of the BRIC countries are in turmoil … Brazil and Russia, and with China slowing, India holds opportunities. Amazon is also playing very heavy in that market,” Sodero said.

He also noted that brick and mortar did not go so well for Wal-Mart in India and if they are going to have a shot at winning share in India it’s going to have to be via e-commerce and most likely that’s going be through acquisition.

“Look at how Wal-Mart ultimately chose to grow e-commerce share in China against Alibaba. They partnered with JD.Com to run their Yihoadian business because that was the best way to participate in a larger share of the business,” Sodero explained.

Secondly Sodero said Wal-Mart U.S. sales are flattening and its best long term growth opportunities are outside the United States. He said growing through acquisition is the best way for Wal-Mart to expand its international footprint and a Flipkart deal makes sense following that strategy.

Thirdly, he said FlipKart’s expertise in “slash sales events” is a different business model than Wal-Mart. But it has not been without issues, especially when advertised products sell out quickly leaving customers frustrated. Sodero said FlipKart is also vertically integrated in that it has its own electronic brands. He said this is an interesting play for Wal-Mart who is a seller of other electronic brands.

A deal for Flipkart won’t be without challenges, Sodero said. The geographic barriers are huge and the business model is vastly different. But that doesn’t mean it won’t work. He said Jet.com was vastly different and that deal was made.

“Wal-Mart is not going to find a perfect glove to fit their hand so they have to make strategic plays when they can do so,” Sodero said. “One thing for certain is that Wal-Mart is going to have to invest in acquisitions to grow e-commerce share against the likes of Amazon and Alibaba. I don’t when it will happen but I wouldn’t be surprised to see them shopping in Latin America as well for an e-commerce play.”

Carol Spieckerman, CEO of Spieckerman Retail, agreed with Sodero’s assessment of the alleged deal with FlipKart.

“Some global markets are better scaled through digital and that certainly describes India. Just as Walmart’s recent acquisition of Jet.com girds its digital presence in the U.S., partnering with Flipkart is an efficient way to make a meaningful move in India,” Spieckerman said.

Continuing, she noted, “Walmart has set its sights on achieving true ‘global e-commerce’ — so has Amazon. By partnering with an established and familiar digital leader like Flipkart, Walmart can immediately go toe-to-toe with Amazon in India. Flipkart benefits from Walmart’s scale and expertise, which will only accelerate through Walmart’s other digital acquisitions. Walmart is well on its way to creating a synergistic, global, digital ecosystem.”

Analysts say FlipKart and its competitors continued to lose money last year because infrastructure investments and deep price discounts on goods eroded margins. It’s hard to imagine that would be an acceptable practice by Wal-Mart, who would no doubt leverage its scale and international expertise to fatten up the margins and still compete with Amazon.

Wall Street values FlipKart at around $11.5 billion, which is more than 10 times the alleged investment reported at $1 billion. Wal-Mart could be considering a minority stake in FlipKart like it did with a 5% investment with J.D.com (5%) in China.