In this Industry Focus discussion dedicated to Walmart's (NYSE:WMT) acquisition of Indian e-tailer Flipkart, the team breaks down the current and future battles in the world's second most populous country between Walmart and its major competitors: Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA).
Find out about the strategies these three behemoths are using to crack the Indian consumer code.
A full transcript follows the video.
This video was recorded on May 15, 2018.
Vincent Shen: We're going to move on to the competition, because there's some really interesting developments there. I'll just add that something to keep in mind if you're a Walmart investor or if you're considering picking up shares, you like this opportunity and you like the other opportunities that it has in its bigger markets, like in the U.S. Walmart does have some experience in India as well. It first entered the market about ten years ago in partnership with Bharti Enterprises and has an existing 21 Best Price stores, totaling about 1 million square feet of brick-and-mortar retail presence in the country.
This deal -- the company is funding it with a mix of cash and debt. When the deal closes, Flipkart will be reported as part of Walmart's international segment. That segment generated almost $120 billion of revenue last year, about a quarter of the company's total top line. Just keep in mind that scale here, again. For a company like this, massive, it takes a lot to move the needle.
On the investor call, analysts dedicated a decent amount of time to questions regarding the deal's impact on Walmart's financials. Asit, you mentioned that $0.60 per share headwind for earnings. I'll just expand on that. The purchase will have a negative impact on fiscal 2019 earnings specifically, about $0.25 to $0.30 per share. And then, the following year, due to those ongoing investments in India, the earnings hit will be another $0.60 per share.
You have to keep in mind that for the trailing 12-month period, earnings were $3.28 per share, so that's no small impact on the bottom line. Not only that, another question that cropped up on the investor call that I think is important is, you have to consider whether a $16 billion spend in India -- that's a 5x sales valuation for Flipkart, by the way so quite generous -- will mean that Walmart will be forced to short change its investments in its home market and other markets. Clearly, the company is thinking about its global footprint right now and its operations.
This is actually the second of two big deals from Walmart in the past month or so, because they also had that announcement regarding Asda and Sainsbury in the U.K. market. Really quick, we didn't cover that on Industry Focus. Recently, Walmart announced that it's going to allow its third-place supermarket chain, Asda, to be acquired by the No. 2 chain, Sainsbury, for about $10 billion in a cash and stock deal. Walmart will still hold on to a 42% stake in the combined company, and that company, if it passes regulatory muster, will take the crown as the U.K.'s largest grocer with $70 billion of sales and 2,000 stores. But management is clearly thinking about their international operations and how they want to right-size things and optimize things.
Going back to Flipkart, though, Walmart's management noted that spending and losses in India will shrink over time. But declining losses, that's not the same as turning a profit. As we've seen with the long history with Amazon, that does take time. Management was ultimately unwilling to look out beyond fiscal 2020 to pinpoint when Flipkart, for example, might transition its bottom line to the black.
The last thing I'll note: if you're a Walmart shareholder, the company also has a pretty spotty track record outside North America. The U.S. and Mexico operations, strong, but the company has either shuttered, sold out of, or downsized operations in places like Germany, South Korea, Japan, and Brazil. It also sold its Yihaodian e-commerce arm in China to JD.com for a stake in JD.com. That's a lot of context and considerations to keep in mind. I think, in this case, Walmart has considered some of those challenges, and they've said to themselves, "We're going to write a big check, $16 billion, to take this majority stake and immediately have a place as the No. 1 e-commerce player in this very fast-growing, important market."
The next thing I'd like to touch on is just what Walmart brings to the table for Flipkart, too. You have to keep in mind that Walmart generates significant revenue from groceries, and Flipkart does not. That presents a big opportunity for Walmart to lend its expertise in that food and groceries category. Retail in India is over $650 billion, and grocery and foods account for the majority of that. They represent something very important in that they are consistent, repeatable purchases. Then, not only that, but Walmart will also have plenty of expertise in terms of any brick-and-mortar operations that pop up, the e-commerce supply chains, and it can connect Flipkart, obviously, with a huge network of product vendors and suppliers.
So all in all, I think from what I've seen, Flipkart will remain a more independent part of the international segment, similar to how Marc Lore has been given the reins for e-commerce within the United States. Then, with Flipkart, their branding is really interesting, because they market themselves as this homegrown Indian success story, and they're focused on really great customer experiences.
But that brings us now, finally, to a look at the competitive landscape. Let's talk a little bit about how competition in India is shaping up. How do things look on that end, Asit?
Asit Sharma: The first thing that we want to look at is, I think, delivery logistics, which I mentioned earlier. Ultimately, this will determine who wins in India. When I order from Amazon, I might order toothpaste. I've done it occasionally. I might order some household goods. But again, in India, because of these small grocers -- the term is kirana, it's like your neighborhood grocer -- there's a large amount of goods on a U.S. website or Walmart or Amazon which you simply don't see as much on a Flipkart website or Amazon.in. The battlegrounds are really in electronics, in mobile phones, and in fashion. Flipkart, as you mentioned, Vince, that's where it's been really successful, and that's where Amazon has to compete. So confined to these goods, the delivery becomes extremely important.
Vince, you mentioned the stumbles that Walmart has had over the years with foreign investments. This is the one thing that bothers me about this deal. In competing with Amazon, I do believe that Walmart will have to invest in more infrastructure. One of the reasons they don't want to talk about eventual profits or losses beyond this window of a year or two is because, I think, they're going to the drawing board and figuring out what they need to build out in India to compete with those fulfillment centers and sorting facilities I mentioned.
Amazon is extremely good at understanding local market logistics. One of the things they've done in India is to go into that very difficult thing called the last mile. Here in the U.S., last-mile logistics may mean, from a UPS center, getting that onto your doorstep, or the U.S. Postal Service getting it to your mailbox. You can imagine a city in India, which, they're incredibly dense, very, very, difficult sometimes to find an address.
Amazon has actually partnered up with thousands of these small stores that I mentioned, these kirana stores. They have about 27,000 stores they have relationships with, and they have an app which enables Amazon to take a parcel from its sorting center to these mom and pop shops, and they can wash their hands of the delivery from there. The mom or pop will deliver the goods to this hard-to-find address, maybe behind a bazaar -- that is, a marketplace -- or in a dense neighborhood. The person who delivers it then gets paid once a month using this app. So Amazon is fighting back against Flipkart's really well-entrenched logistical capability. And Walmart is going to have to invest here.
Moving on, we should talk about the other big player in India, and that's Alibaba, the company founded by Jack Ma. Alibaba is sort of interesting. I talked about how Walmart is coming in and getting this one piece. Alibaba is very methodical in the way it enters countries. India is actually its first real big foray outside of China. And they have started with two interesting acquisitions, to me. The first is a company called PayTM, like ATM, it's pronounced Pay-t-m. This is another phone-enabled payment service, and it's a competitor to Flipkart's own PhonePe service. This was acquired in, I believe, 2015. I might need to correct that in a moment.
Shen: It wasn't too long ago.
Sharma: It wasn't too long ago. Alibaba has only been in India, actually, for about two years. Recently, they added to their strategy by acquiring a company called BigBasket. This was a $200 million acquisition of an online grocer. Vince talked about the importance of grocery to Walmart. In a country with 1.3 billion people, where food distribution is a problem and the options for people who have resources -- that is, this burgeoning middle class -- those options are expanding. It's really important to get a foothold in the online grocery marketplace, and Alibaba has made its first investment in this space there.
So you see Alibaba also coming in, picking and choosing its own parts of the battlefield. But you can look for them to also be a formidable competitor. Right now, they don't have the type of market share that Flipkart and Amazon do, but as a Walmart investor, you want to keep your eye on what Alibaba's up to.
Shen: Yeah. I'll say, just to wrap up the competitive discussion, some things to remember, especially with Amazon, is they're entering this Indian market, and I feel like, in the back of their minds, they're kind of remembering what happened to them in China, where they were shut out by domestic players like Alibaba and JD. So they're going to be very aggressive in how they invest in India. I think they've already had plans to invest about $5 billion in the region, and it has only taken them a few years to catch up and take the No. 2 position behind Flipkart in terms of e-commerce. Half of that $5 billion dollars that they've spent, I've found, has been in logistics -- faster, more reliable delivery. Amazon has seen how important that convenience was in setting it apart in its home market, and I'm sure they believe that a robust logistics delivery network will offer similar advantages in this market.
In terms of market share, some of the numbers varied by source, but I found market share figures for Flipkart and for Amazon at about 36% and 20% respectively in 2017. In terms of the war chest for these companies, prior to this Walmart deal, Flipkart's estimated to have raised about $7.5 billion from other investment and funding rounds. As of August last year, the company said that they had about $4 billion on their balance sheet to grow operations in India. But on a monthly basis, I found an interesting number where Amazon is burning through about $35 to $40 million every month in this market, while Flipkart is at about half that, $17 to $18 million, as they've had to rein in their spending a little bit.
Those are the top two players. Alibaba, I think, we've covered the big investments that they've made. In total, I think, they've spent about $2 billion in India through these various start-ups, these various e-commerce companies. Some others that I found include Zomato, that's a food tech start-up; Xpressbees, another logistics start-up. Overall, Alibaba appears to be taking a slower approach, but they're keeping a very long-term mindset as they develop the important pillars to their e-commerce strategy, and that includes, for them, logistics, payments with PayTM, and then grocery.
Closing out our discussion here, I'll note a few other things about this deal and what to look forward to. Brett Biggs, he's the Walmart CFO, he mentioned during the investor call regarding the deal that other parties might actually come in on this investment round. I thought that was interesting to note. I haven't seen any news regarding who those investors might be.
But I actually have seen reports about a potential change of heart from SoftBank and their initial decision to part with their entire 21% stake in Flipkart. Apparently, SoftBank said on paper that they're ready to sell out of their entire stake. That's a big part of this deal and what drove Walmart to make the announcement. But now, they're having second thoughts, potentially. But even if they do, and Walmart doesn't pick up SoftBank's specific stake, they'll still be a majority shareholder, but their stake will be closer to 56%. That's just something interesting to keep in mind as that part of the negotiations is finalized. You mentioned, Asit, earlier, that Walmart will have the option to invest an additional $3 billion more in Flipkart at the same valuation level within a year of closing the current deal. That might bump up its ownership stake as well.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Asit Sharma has no position in any of the stocks mentioned. Vincent Shen owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and JD.com. The Motley Fool has a disclosure policy.