Why Flipkart Offers Walmart Something Unique in the Indian Market

In this segment from Industry Focus, Vincent Shen and senior Motley Fool contributor Asit Sharma break down Walmart's (NYSE: WMT) land grab in the Indian retail marketplace.

Learn about the appeal that Flipkart has as a full platform as well as some unique variables for Indian consumers.

A full transcript follows the video.

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This video was recorded on May 15, 2018.

Vincent Shen: The timing of this theme week, for me, at least, for the consumer and retail sector, couldn't be any better, given the huge news in consumer and retail that we've been processing the last few days. And that's the deal announced between Walmart and Flipkart. The $16 billion transaction is going to have significant implications for Walmart investors, for consumers in India, and other major e-commerce companies that are looking to gain a foothold in the Indian market like Amazon and Alibaba. To cover all that and more, I've enlisted the help of senior Motley Fool contributor, Asit Sharma. Hey, Asit! Welcome back!

Asit Sharma: Vince, namaste!

Shen: Great to have you with us! We have a lot to cover. We're going to jump right into the discussion. First, a little bit of context and some highlights from the official deal announcement, because we first covered the possibility that Walmart would invest in Flipkart back in March. At the time, it was reported to be just a $7 billion deal for a big stake of the company. Since those initial rumblings, and as investors have been waiting for an official deal to be announced, we kept hearing that it was imminent pretty much week after week. There were also reports that Amazon would potentially make a rival bid to prevent Walmart from succeeding.

But Walmart has finally delivered that final announcement. They did it on May 9th. The value of its investment in Flipkart has come out to $16 billion. This is the biggest deal ever for Walmart. It easily eclipses its $3 billion acquisition of jet.com from 2016. That $16 billion includes about $2 billion of new equity funding to support Flipkart growth. That's a necessity, given the competitive environment, which we'll dig into more later in the show.

With this deal, Walmart will get a 77% stake in Flipkart. That implies a total valuation for Flipkart of about $21 billion -- quite a jump from as recently as November 2016, when the company was valued at less than $6 billion. Then, the remainder of the ownership will be held by current investors. That includes some pretty big names like Tencent, Tiger Global, and Microsoft, and also the co-founder, Binny Bansal.

Before we go any further, I think the next thing we need to do is really lay out for listeners what Walmart is getting for this $16 billion check that it's writing. Asit, can you tell us a little bit more about Flipkart, the market in India, and what makes it such an attractive buyout target for any big retailer that's eyeing this region?

Sharma: Sure. As our listeners are probably familiar with, India is a huge market. There are 1.3 billion people in the market. But it's highly fragmented. India is a country which still has quite a rural population, and large swathes of the monetizable market there is based in big cities. Flipkart has sprung up in a short amount of time. The company was founded in 2007 by two guys who were friends, Sachin Bansal and Binny Bansal -- no relation, same last name. These two guys essentially had worked for Amazon and started out selling books online. Does that story sound familiar?

The company grew through acquisition and multiple rounds of funding. Today, it services most major cities in India. One of the prime pieces that Walmart obtains by buying Flipkart is this logistics or supply chain arm. This is called Ekart. Now, as Walmart announced in its press release, Ekart is in more than 800 cities, and it makes 500,000 deliveries daily. That's a massive amount for a country which, again, has quite a rural population. There's a lot of supply chain depth and expertise there.

In addition, Flipkart has been a serial acquirer of smaller businesses. It's bought fashion houses like the site called Myntra. There's another site called Jabong, which is an online fashion destination and a company called PhonePe. PhonePe is extremely interesting. It sounds like I'm saying "phone pay" -- translated from Hindi, roughly, this means "on the phone" or "you can do it on the phone" or "where the phone is". This is a burgeoning phone-based payments app. We will probably get deeper into the relation of payments to this whole e-commerce bit in India when we talk a little later in the show about competitors like Amazon and Alibaba, but PhonePe is another integral piece of this system that Walmart is buying.

Amazon, of course -- which, again, we will get to in a moment -- has a foot in the door. Alibaba is going in stages. It's entering the market very methodically. Walmart gets instant entry into a business which did about $3 billion worth of U.S. revenue last year.

And lastly, I want to add before I send it back to you, Vince, Flipkart has pioneered a holiday that it created by itself. These are Billion Dollar Days. You have Singles Day in China. In the U.S., you have Black Friday and Cyber Monday. Billion Dollar Days is sequence of five days in India which takes place during the festival season in the fall. This is late September. Flipkart tells everyone in India that prices are going up, but during these five days, you're going to see them lowered. It's become a huge week of selling for the company. Walmart instantly acquires that big surge of sales within five business days. Again, we'll talk more about that.

But what I see is, it's getting an integrated piece of e-commerce, which, with its own very ample resources, it can extend and try to dominate before Amazon grabs the market share that Flipkart's created.

Shen: Sure. I think what you mentioned, in terms of this integrated organization, is really important. The Flipkart umbrella, like you said, it includes that namesake platform and then that fashion focus, Myntra and Jabong, that PhonePe payments business, the Ekart supply chain segment. The almost four-for-one nature of this deal is very, very important, because it offers that full e-commerce package with the marketplace, with apparel retail, with the payments business and the beginnings of a pretty extensive fulfillment and logistics network that Walmart will be able to build off of.

I found some figures for the broad retail industry in India. Electronics and apparel account for about 47% and 31% of online shopping respectively. As it turns out, large appliances, fashion and mobile phones and electronics make up the most important categories for Flipkart, as well. That aligns quite well for them.

Then, getting into some of the additional specific numbers for the company and then for the opportunity, for the fiscal year ending March 31st, Flipkart had annual gross merchandise value pinned at about $7.5 billion. Then, the revenue was around $4.6 billion. It might be a little different than what you mentioned, Asit. A few of the different sources, depending on what time of year, the numbers differ slightly. But what's important to keep in mind is both those figures in terms of gross merchandise value and revenue, they were both up 50% year over year from what I could find in the press release. Then, active customers for the company as well, they've grown about 7x since 2014 to over 50 million last year. Important to note that.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Asit Sharma has no position in any of the stocks mentioned. Vincent Shen owns shares of Amazon and Tencent Holdings. The Motley Fool owns shares of and recommends Amazon and Tencent Holdings. The Motley Fool has a disclosure policy.