New Indian law calls into question Walmart’s $16 billion Flipkart investment

by Kim Souza ( 797 views 

When retail giant Walmart invested $16 billion into a majority stake of Indian e-commerce platform and logistics arm, Flipkart, it was the most expensive acquisition in the company’s 56-year history. Walmart executives said from the get-go this was an extended play with potential too big to ignore.

Walmart CEO Doug McMillon said the short-term risk in the large investment would be worth it long-term.

“In India, it’s worth it. I believe we will look back five to 20 years from now and say it was a bold bet, but it was worth it. We are not running this thing for a year. We’re looking for long-term success,” McMillon told analysts following the company’s shareholder meeting in June.

Fast forward six months and a new Indian law designed to protect small shop-keepers will no doubt negatively impact Walmart and Amazon’s ability to leverage supply chain expertise or sales of private brands to Indian consumers.

The new law prohibits foreign companies from selling products from affiliated businesses on their Indian sites and no discounts nor product exclusives will be allowed.

Walter Loeb, a retail analyst, said the impact of this law is “far-reaching.”

“In addition, the new law, which will go into effect on February 1, 2019, will not allow foreign companies to use their supply chain expertise to achieve reduced prices for the Indian online shopper. Thus, Walmart’s everyday low price policy may not apply in India. That hits right at the heart of the company’s strategy,” Loeb noted in a recent blog.

Loeb said Walmart should have known India’s Prime Minister Narendra Modi’s administration was turning protectionist.

“In the coming election, he needs the support of Indian retailers and has also indicated that he will impose tough new rules on the technology industry as well. Walmart, who saw unique opportunities through this acquisition, misunderstood the current mood. It seems to me that they focused too much on beating out Amazon,” Loeb noted.

Walmart and Amazon have said they are still evaluating the impact of this new law and offered no further comment. Walmart has said previously that part of the reason Flipkart looked so attractive is that it controls its own ecosystem. Walmart has also said it plans to work closely with local suppliers and farmers inside India as it expects the venture will add jobs and opportunities for the Indian population.

Loeb noted Walmart has had troubles exporting its business model to Brazil, Japan, Germany, South Korea, and this recent law change will be a headwind to the company’s growth plans in heavily populated India.

Supply chain expert Annibal Sodero, professor at the University of Arkansas, told Talk Business & Politics Walmart has no choice but to look outside the U.S. for long-term growth. He applauded the Flipkart deal saying there is no perfect fit for Walmart, but the retailer has to make strategic plays when it can do so. He said Flipkart fits the model and there will no doubt be challenges and barriers to overcome.

“That doesn’t mean it won’t work,” Sodero added.

Wall Street investors have stood pat on Walmart since the news hit Dec. 26. Walmart shares (NYSE: WMT) were trading at $92.78, up $1.20 at mid-day Friday, (Dec. 28). For the past 52 weeks, Walmart shares have traded from a high of $109.98 and a low of $81.78.