Walmart (NYSE:WMT) shook the e-commerce space a couple of months ago when it announced that it would acquire a 77% stake in Indian start-up Flipkart for $16 billion. The Bentonville-based big-box retailer is currently busy raising capital to close this acquisition, even as analysts and investors remain skeptical about the value that Flipkart will add to Walmart's e-commerce ambitions.
But a recent Q&A session with the investing community makes it clear why Walmart has spent such a princely sum for Flipkart.
Flipkart's ecosystem can help Walmart achieve big things
Walmart International executive Judith McKenna emphasizes that Flipkart is more than just an e-commerce business. McKenna outlined that apart from having an online e-commerce marketplace connecting buyers and sellers, Flipkart also has a solid delivery infrastructure of its own in the form of eKart -- its logistics division.
In fact, eKart makes about half a million deliveries annually across 800 cities. This gives Flipkart-Walmart a solid and scalable backbone to execute deliveries in a fast, efficient way. Walmart can potentially use this delivery network to further its ambitions in lucrative categories such as grocery, as well as bolstering the omnichannel retail network to grow sales.
McKenna pointed out that Walmart currently has 21 physical Best Price stores in India that operate under a cash-and-carry model, with plans to deploy 50 more such stores going forward. These cash-and-carry stores will function as a separate entity from Flipkart, but Walmart won't hesitate in "clearly sharing ideas and getting synergy where we can."
This possibly means that Walmart is looking at integrating the online operations of Flipkart and its delivery network with its existing physical locations to give customers an experience that Amazon (NASDAQ:AMZN) has been unable to provide so far. For instance, you can look up a smartphone on Flipkart's e-commerce site and visit the nearest Best Price store to try it out before making a purchase.
A customer could also order groceries from one of the Best Price stores, and Walmart will make a delivery using eKart's logistics network. Amazon is unable to provide such an experience in India since it lacks the physical presence that Walmart has, giving the latter an edge in the region.
But this is just a small part of what Walmart is planning to do in India, as a new initiative to promote mom-and-pop stores could help the retailer make an even bigger splash.
The bigger picture
Walmart has been promoting small, family-owned grocery stores in India for a long time now through its "Mera Kirana" (Kirana is a mom-and-pop store in the Indian parlance). Under this program, Walmart's Best Price stores showcase a model mom-and-pop store for families to replicate. The company also sends out teams to such stores to help them organize their inventory and improve product assortment and placement.
Walmart claims that out of its one million active customer base in India, 70% are from such mom-and-pop stores. Not surprisingly, the company is now looking to support such stores with the help of fulfillment centers. Walmart recently opened a fulfillment center near India's financial capital, Mumbai, in a period of just 60 days, and it is now on track to open such a facility in the northern part of the country.
These fulfillment centers will help Walmart service the mom-and-pop stores faster than before. Also, small traders will be encouraged to open more such shops, because they can be assured of fast replenishments from Walmart.
So Walmart's Mera Kirana program is designed to boost the company's physical footprint in India and assist its move toward the omnichannel. One can simply buy groceries online and walk into a nearby Walmart Mera Kirana-powered store to pick up those items. Additionally, it won't be surprising if Walmart decides to start making local deliveries through these small stores, using Flipkart's logistics, to reach a wider audience.
Such a move could help Walmart cut its teeth into the burgeoning online grocery segment in India that reportedly hit nearly $1 billion in sales last year, according to RedSeer Consulting. What's more, TechSci Research estimates that online grocery sales in India could increase at an annual rate of 55% through 2021.
A smart move
The questions raised about Walmart's valuation of Flipkart might seem valid at this point given the latter's booming losses and slowing rate of sales growth. But Flipkart's online presence, delivery network, and Walmart's physical locations could help take the game to Amazon that's restricted to an online-only model for now.
So there seems to be a lot of opportunities in the deal that should eventually help Walmart justify the huge price that it has paid to enter India.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.