Amazon (AMZN, Financial), Alibaba (BABA, Financial) and now possibly Wal-Mart (WMT, Financial) are in the fray to get market share in the Indian subcontinent.
Wal-Mart’s intentions to invest in Flipkart, an Indian e-commerce major, are still in their early stages, and nobody knows how much the company will invest and how deeply the company will be involved in Flipkart’s operations in India, if the deal goes through. But I am a firm believer that competition is not just a good thing for the industry, but it’s a great thing for us as consumers. Without it, we will always end up paying a heavy premium for the services we use.
Several large retail companies are now focusing on India
Wal-Mart’s e-commerce entry has all the ingredients to shake up not just the Indian market, but the global e-commerce industry as well. The Indian e-commerce market has suddenly and very recently piqued the interest of several global majors. Amazon, Flipkart and Snapdeal are currently the top players in the market, with Amazon and Flipkart enjoying a huge lead over all other players.
Against this backdrop, Chinese major Alibaba has already made investments in Snapdeal, and they have also upped their investments in another payment-gateway-turned-ecommerce-company Paytm. So it's clear that we have two top U.S. players and one Chinese player eyeing the fast growing Indian market. This unlikely Indian-Chinese-American mix - Flipkart with the possible backing of Wal-Mart, Snapdeal and Paytm with the backing of Alibaba, and Amazon on its own - has the perfect ingredients for a gripping battle for e-commerce dominance in the Indian subcontinent.
Amazon has steadily increased its investments in India and, according to reports, the company recently replaced Flipkart as the top player in the Indian market. Both these companies have been fighting tooth and nail to grab the ‘top player’ crown in the e-commerce market.
Why Wal-Mart’s Flipkart investment matters
But until now, it hasn’t been an even fight. Flipkart being a startup has so far relied on funding from private investors to keep its investments going. The e-commerce game is indeed a brutal one that requires players to be ready to accept losses for a long time as they search for volume. The higher the volume, the better the probability of your operations becoming profitable. Amazon took many years in the U.S. market to get to a stage where it can show consistent profitability. Their North American sales have surpassed $60 billion and, as sales improved, their operating margins in the region are hovering around 3%.
It’s clear that during the early stages, e-commerce companies have to accept losses, with external funding being the only to stay in the game. Though Flipkart has so far managed to raise billions of dollars in funding, Amazon slowly upped the ante by increasing its India investments by $5 billion in under two years. If you have to keep pace with Amazon, then you will have to keep investing. Wal-Mart has huge reserves of cash and it can keep pumping money into Flipkart if needed, and in the process they can keep increasing their stake in the company as well. And let’s not forget the added advantage of keeping Amazon on its toes. If the gambit proves successful, all Wal-Mart needs to do is to rinse and repeat that success in all other markets.
Why India over China?
One might also question why all three major retail players are concentrating on India. Unlike China, where the government makes sure that only local players thrive at the cost of everybody else, you at least get a level playing field in India. Yes, there are problems with infrastructure, bureaucracy and so on, but the problems are the same for everyone, not the same as what foreign players face in China.
The Indian e-commerce market is obviously not yet as big as those of developed countries. India’s gross domestic profit is much smaller than China’s and that of developed nations. But it is a growing industry, nobody knows how far the Indian market will grow in the next ten years, and at the very least retailers have a predictable environment, which is the real reason behind the top players planning to take each other on in the Indian market
"We now increase our 2020 estimate (of India's ecommerce market) from $102 billion to $119 billion," Morgan Stanley Research said in a report. "This takes our estimate of the total Indian Internet market size from $137 billion to $159 billion (now including online food aggregation business)." Morgan Stanley said a global macroeconomic slowdown could affect the flow of VC/PE money into India, thereby slowing gross merchandise value growth and lowering valuations. - Economic Times
If the Wal-Mart investment in Flipkart does prove true, this gives the world’s largest retailer massive leverage in the fight against e-commerce worldwide.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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