"Flipkart was a company that was built to be sold. First, the founders sold their stake to financial investors and now they are finally looking to sell a majority stake to a strategic investor,” says Harminder Sahni of Wazir Advisors. Indeed, for a company more in the news for its valuation and fundraising than anything else, things are finally falling in place. Two years after Walmart first started talking to Flipkart in 2016, the world’s largest retailer is said to have completed its due diligence and has made an offer to buy more than 51% stake in Flipkart for $10-12 billion through a mix of primary and secondary shares, which could value the company at around $20 billion. The secondary shares will be purchased at a discounted value to the primary and most of its early investors including Tiger Global, Accel Partners, Naspers, IDG Ventures and others are expected to cash out in this round. The deal is likely to be completed by the end of June. The deal raises Flipkart’s valuation by 70% from the $12 billion that it was in the previous round in August 2017, where it raised $2.5 billion from Japanese conglomerate SoftBank. For a company that was nearly written-off in its e-commerce battle with Amazon, it is a stellar comeback. For Walmart, it is the quickest way to gain scale in India, and for Amazon, acquiring Flipkart would have given it complete domination in a market that is becoming increasingly important for it.

While Walmart has maintained that India remains an important market, it has hardly made any headway in the $670-billion market. After it split up with Bharti Enterprises after its seven-year partnership, Walmart now caters to the B2B segment through its 21 cash and carry stores, Best Modern, besides having a fulfillment centre in Mumbai. With over a million members, mainly consisting of mom-and-pop stores, hotels, and restaurants, the Indian arm of the world’s largest retailer clocks a modest revenue of Rs.3,600 crore.  Policy constraints with respect to FDI investment in multi-brand retail resulted in Walmart never opening its trademark stores in India. Less than 5% of its stores in key markets of the US and China cater to the B2B segment. Flipkart, thus, will provide Walmart with a larger retail presence in one of the world’s fastest growing market. While refusing to comment on the possible strategic investment in Flipkart, Rajneesh Kumar, senior vice-president, corporate affairs, Walmart India says, “India continues to be an important market for Walmart. We currently have 21 stores, which will increase to 70 stores over the next three years. We have over a million members and about 95% of sourcing is done locally.” While he maintains that the company will focus on this segment, he adds that the company’s foray into the retail segment will be determined by changes in the existing policy. Currently, India allows 51% FDI in multi-brand retail, but it comes with several riders. That explains why none of the large international retailers have made any significant investments in the market. “Despite being the world’s largest retailer, Walmart has stayed on the fringes of the Indian retail market. It has lost the online battle in the world’s two largest retail markets to Amazon and Alibaba. Unless it makes a bold bet (by acquiring Flipkart), it will lose out on India too,” says K Ganesh, serial entrepreneur and partner, GrowthStory.  

Not just in India, Walmart has also been a late entrant in the US e-commerce space where Amazon has taken the lead. While most retail companies were investing to create an online presence during the time Amazon came into the picture in 1996, the retailers went back to focus on the brick and mortar business after the dot com bust in 2000. “The other retailers changed when the dot com bust happened, but for Amazon, it was a question of survival. The online business was all Amazon had and so it had to keep innovating and improving customer experience. By 2005, when retailers realised that e-commerce was here to stay, Amazon already had a significant head start, while other players like Walmart are yet to catch up,” says Kartik Hosanagar, professor of marketing, The Wharton School, University of Pennsylvania, whose research work focuses on the digital economy. While Amazon dominates the online retail market with a 43% market share, Walmart has a marginal presence with less than 4% share despite being the largest retailer in the world having an annual revenue of $495 billion (more than 2.5x that of Amazon). But in terms of market capitalisation, Amazon is more than double that of Walmart at $697 billion, given its average revenue growth over the past five years has been 19.19% compared to Walmart’s 0.91%. 

Walmart has been investing to strengthen its online presence in the US through a series of acquisitions. In 2016, Walmart bought US-based online retailer Jet for $3.3 billion followed by Shoebuy, ModCloth, and Bonobos as it doubled down on fashion in 2017. Most of its acquisitions have been led by Marc Lore, the founder of Jet, who now heads the e-commerce initiative at Walmart. Lore sold his earlier company Quidsi, which owned the portal Diapers, to Amazon and was part of Amazon before he quit the company to start Jet. He now spearheads all of Walmart’s online initiatives.

For now, Hosanagar says that although the online battle in the US is tilted in favour of Amazon, Walmart with its presence in both the physical and the digital world still has the chance to define what omni-channel retail will look like. The lines are blurring fast and the retailers feel that forming an omni-channel presence is the way to go. That’s why Amazon and Alibaba are building walk-in stores and Walmart, which operated 11,695 stores across the world in 2017 is wooing its customers to get online.

But the company needs to step up fast since Amazon is already making a significant investment to increase its offline presence. While its $13.7-billion acquisition of Whole Foods will go a long way in achieving that, Amazon is also setting up more cashier-less stores this year. After the success of its first Amazon Go store, the company is looking to set up at least six new stores this year. It is also placing Amazon lockers in Whole Foods stores where customers can order online and pick up the products from the lockers placed inside the stores, taking customer convenience to another level, and thereby bringing in more footfall into the stores. Walmart, too, is now offering larger discounts if customers agree to pick up products and has set up 500 pick-up towers across the country. “Walmart, rather than leading innovation, has been a fast learner and tends to follow Amazon’s footsteps. This is enough for them to stay in the race, but not sufficient to get ahead. Most of its acquisitions in the US have been incremental rather than disruptive,” says Hosanagar. 

However, when it comes to China, Walmart has fared better than Amazon. “Amazon entered China with thinking it can do it all but it failed to crack the market. Walmart, on the other hand, fared better by partnering with a local player that had a better understanding of the market,” says Jagdish Sheth, professor of marketing at Emory University’s Goizueta Business School. Walmart first acquired a stake in Yihaodian, an e-commerce company that specialises in grocery, in 2011, before increasing its stake to a 51% and then buying out the company completely in 2015. Yihaodian, which accounted for less than 2% of the overall e-commerce spend, wasn’t big enough to move the needle for Walmart. That’s when it decided to sell the business to the website JD and pick up a 5% stake in the company in return. Alibaba and JD control about 80% of the e-commerce market in China. Walmart increased its stake from 5% to 12.1% in February 2017. Walmart has opened a store on JD’s portal, which carries nearly 1,700 of Walmart’s most-frequently purchased products from its brick-and-mortar stores and the orders are fulfilled by JD. Considering that JD’s revenue in 2017 was $57 billion and it currently enjoys a market cap of $56 billion, it is Walmart’s biggest investment in the online space till date. In China, Walmart has around 475 stores. In 2017, it opened 40 new stores apart from remodelling 62 existing stores, thereby investing 300 million Yuan. Still it is not a player to reckon with in China and it never will be given the dominance of the local players who control the online market.

That makes India the last battle ground for Walmart to conquer. Walmart seems all set to pull out all the stops when it comes to acquiring Flipkart. “It is likely to follow a blue print similar to that of China in India too and Flipkart appears to be the better suited partner given the complementary strengths,” points out Hosanagar who calls the Walmart-Flipkart deal an alliance of the ‘Amazon-worrieds’. Venky Harinarayan, founder at Rocketship Ventures, says Amazon is a tough competitor to beat in any market, and competitors are likely to form alliances across markets to compete against the world’s largest online retailer. “You cannot win the game by doing what Amazon is doing. At best you can be a worthy competitor. If you want to win against Amazon, you have to change the game. While omni-channel is an opportunity for Walmart, to do that, it has to clearly articulate its value proposition across selection, pricing and fulfillment — something that Amazon has mastered over the years,” says Harinarayan whose companies Junglee and Kosmix were acquired both by Amazon and Walmart respectively.  He has worked closely with Jeff Bezos in building out the marketplace at Amazon

Winning hand
For Flipkart, snagging a $20 billion valuation is a comeback of sorts given that it was struggling both in terms of execution and fundraising two years ago. In fact, 2016 was a year of mark downs with investors such as Morgan Stanley, T Rowe Price, Fidelity and Vanguard marking down their investment by 20%-50%.

Flipkart found itself in a mess, thanks to some strategic missteps after its massive fund raising in 2014-2015. In July 2014, the company was on a high when it raised $1 billion in a round lead by Tiger and Naspers at a valuation of $7 billion. “We believe India can produce a $100-billion company in the next five years and we want to be that,” said Sachin Bansal, one of the founders, while making the deal announcement. At that time only Uber had raised a larger round at $1.2 billion. While Flipkart was feeling invincible, Amazon managed to take away some of its thunder by announcing a $2 billion investment in India the very next day. Amazon had launched its operations in India in July 2013 and Flipkart needed that extra money power to battle Amazon on offerings, discounts and return market share.

Luckily for it, this was also the time when there was a funding deluge in the Indian start-up ecosystem. Making the most of it, Flipkart raised another $1.4 billion at a valuation of $11 billion in December 2014 and at a valuation of $15.5 billion in April 2015. Shortly after this, things started to unravel for the homegrown e-commerce major. Flipkart’s move to becoming a marketplace from an inventory-led model and its mobile app experiment didn’t take off as planned, which meant the company slipped on its sales target and customer service. Flipkart as a brand suffered as the third party vendors couldn’t match up to company standards. While Flipkart’s valuation soared from $1.6 billion in 2013 to $15 billion by December 2015 its financial performance struggled to keep pace. By then, Flipkart employed more than 33,000 people with salaries alone costing them nearly Rs.2,000 crore in FY16.  In a bid to appease investors who were getting restless with Flipkart’s experiments and wanted to see quick results, Binny replaced Sachin as CEO in January 2016. The focus was back on improving revenue and reducing costs rather than building out Flipkart as a product-led company, which had been Sachin’s dream.

As a first step Binny started by cutting back losses and focusing on improving customer service levels by going back to its previous inventory-led model. While costs were brought under control, revenue growth was no longer on steroids. Amazon’s increasing marketshare put Flipkart on the backfoot for the first time. “Until then, competition was never ever in the picture, not even in our presentations. We were competing with ourselves because we didn’t see competition build any real capability until Amazon came along,” says a former senior Flipkart executive. It was clear that Flipkart was fighting too many fires at the same time. It brought in an old hand from Tiger Global, Kalyan Krishnamurthy, to turn things around. His mandate was clear — to bring back lost revenue momentum while keeping a tight lid on costs. It was Krishnamurthy’s second stint. He had earlier stepped in as interim CFO in 2013 to do the same thing as Amazon and Flipkart were battling it out in an intense discounting war. Once things stabilised, he went back to managing investments at Tiger Global in 2014. Cut to 2016, his first task was to ensure that Flipkart didn’t cede ground to Amazon during its upcoming flagship Big Billion Day (BBD) sale in October 2016.  It was Krishnamurthy’s baby since he helped put together Flipkart’s first BBD in 2014. He quickly swung into action. While there were a lot of glitches in executing its first BBD sale in 2014, it was the exclusive deals with smartphone manufacturers that played a crucial role in helping Flipkart achieving its $1-billion target. Flipkart had exclusive tie-ups with Motorola and Xiaomi. While margins are low on these deals, they brought in the much needed GMV.  Achieving $1 billion in revenue during that sale gave investors a glimpse of the scale that was possible in e-commerce. Investors were only glad to take out their cheque books and pump in $1.4 billion in the following rounds. But as competitive pressure increased and things started to unravel at Flipkart, smartphone manufacturers like Xiaomi and Motorola no longer remained exclusive and shifted to other marketplaces. Krishnamurthy brought the brands back on Flipkart’s platform. Also, Flipkart’s no-cost EMI offering and exchange schemes helped consumers trade in their existing models for those with higher value. In January 2017, Krishnamurthy was appointed as the company’s CEO and Binny became the group’s CEO. With the focus back on execution, things were starting to fall in place for Flipkart. Smartphones continues to be the largest revenue generator for the company which recently tied up with Taiwanese manufacturer, Asus, for an exclusive partnership. According to the company, it accounts for 25% of all the smartphones sold in the country and the target is to take the share to 40% by 2020. About 80 million smartphones were sold in 2017 and about half of them were sold online.

Apart from reclaiming lost ground in the smartphone segment, fashion is another vertical that has worked well for Flipkart. Thanks to its acquisition of Myntra and Jabong, Flipkart  has a 70% share of the $3.7-billion online apparel market. In 2014, with Amazon firing on all cylinders and margins on smartphones only trending lower, Flipkart realised that it needed to create a leadership in a key vertical with better margins and one that wasn’t Amazon’s strong point. So it turned attention to Fashion. Luckily for it, Myntra was struggling to raise further capital and having a common set of investors only made the choice to acquire Myntra easy. In May 2014, Flipkart bought Myntra in a deal valued at $300 million. “For Myntra, the decision to sell it out was the best decision at that point given that raising capital and achieving scale was a challenge. Today, companies have access to double the capital they need, which helps them scale up quickly,” says a former investor in Myntra. Flipkart also picked up the distressed Jabong in an all-cash deal worth $70 million in 2016. Both acquisitions worked well for the company. According to Flipkart, one in every two customers visit the platform  for its fashion offering, enabling the business to clock over $1 billion in revenue making it the second largest player after Myntra. “Flipkart was early to spot the opportunity in fashion and both its acquisitions have helped the company establish complete dominance over Amazon in this segment. It seems to be neck-to-neck in the other segments,” says an investor who had invested in Myntra. As a result of Flipkart’s focus on high value smartphones, consumer electronics and fashion, its average order value went from Rs.2,337 in September 2016 to Rs.3,134 in December 2017. (see: More value per package) 

Show me the money
In 2017, Flipkart managed to raise nearly $4 billion in two separate tranches in a single year; almost three-fourth of the $6 billion raised since 2007 led by SoftBank, China’s Tencent Holdings, Microsoft and eBay. The funding couldn’t have come at a more appropriate time since its accumulated losses jumped from $1.5 billion in FY16 to $3.6 billion in FY17 even as revenue increased by 29% to touch $3 billion. 

Following the massive fundraising round, Krishnamurthy had stated in an interview, “Profitability is not the highest priority today. We will again go into a very clear consumer market-building mode and expand the market. We want to bring as many people as possible into the e-commerce fold, add more categories on a regular basis and we will invest in that. We are very comfortable with the cash burn that we have today.” Satish Meena, senior forecast analyst at Forrester Research says that the days of mindless discounting are over. “E-commerce players have realised that catering to customers fishing for discounts is not a sustainable strategy as such customers are not loyal. The race to have the highest GMV is over. Now, the challenge is getting the existing customers to transact multiple times across various segments on their platforms,” he explains. 

Now, Flipkart’s focus is, thus, to increase the number of active monthly users, which is currently over 10 million. It is looking to at least double this number by the end of this year. With over 100 million registered users, it is looking to increase presence in high-frequency segments. While it has launched its grocery services in Bengaluru a couple of months back, the plan is to expand to four more cities by June, 2018. Organised players form only $10 billion out of the overall $360-billion food and retail space. No wonder both Amazon and Flipkart are eyeing the segment but execution is tough and only a few have got it right. For Amazon, groceries and household items is the largest product category in terms of units sold, and the company says it could account for more than half of their business in the next five years. Since food and grocery is Walmart’s forte with over 50% of its revenue coming from this segment, an alliance would work to their advantage. If Walmart’s products is distributed through Flipkart, it will be able to take on Amazon in this already tough-to-execute segment.

Flipkart is also exploring acquisition opportunities in the food delivery, hyper local and fintech space. It is said to have been in talks with food delivery players such as Swiggy and Zomato, hyper local service provider, UrbanClap, and fintech firms that offer investment and wealth advisory where its payments subsidiary, PhonePe, can be leveraged further. PhonePe, which was acquired in 2016, has helped Flipkart establish itself in the payments space. Flipkart has tied up with Swiggy to offer its users a one-tap checkout process, which makes the payment a seamless experience. This is PhonePe’s first foray into the food delivery space. “PhonePe has done really well in terms of usage and reach given that it has access to only a fraction of the resources that a Paytm has,” says Aman Kumar, co-founder and Chief Business Officer, KalaGato. According to the company, PhonePe drives the highest number of UPI transactions in India and can be used as a payment option across 60,000 offline and online merchants.

Flipkart has also tied up with online travel giant, MakeMyTrip, to offer ticketing services marking its foray into online travel segment. The online travel segment is projected to reach $48 billion by 2020 clocking an average growth rate of 11-12%. Flipkart consumers can book on MakeMyTrip, Ibibo and redBus through its website. “Travel is one of the most successful online businesses in the world. So it is no surprise that everyone wants a chunk of that market. But execution is not easy since you have to deliver on customer experience every single time. So you can’t win in this by discounting alone,” says Deep Kalra, founder, MakeMyTrip. “Flipkart is a company we are comfortable working with. Rajesh, one of our co-founders, is on its board. The deal will enable us to reach out to a wider consumer base of over 100 million, which will help catalyse the huge opportunity in the online travel market.”

Amazon, too, is looking at increasing its presence across categories such as food delivery, grocery and hyper-local and is actively scouting to snap up other companies in these segments. “Ever since the talk about Walmart-Flipkart started gaining momentum, Amazon’s corp desk has been on an overdrive. Almost all our portfolio companies in the vertical e-commerce space have got an offer from Amazon,” says a Benguluru-based VC. “Amazon is aware that if the deal with Walmart goes through, then this battle cannot be won with capital alone. So, the objective is to offer a gamut of services that will get users to repeatedly transact on its platform.” Both Amazon’s and Flipkart’s approach is very similar to Chinese internet giants such as Alibaba and Tencent, who increased transactions on their platforms by acquiring rivals and picking up stakes in Internet companies in areas they didn’t have a presence. 

Amazon, too, has been making a lot of strategic moves to consolidate its presence in India including picking up a stake in Shoppers Stop, an offline retailer; introducing its flagship products Alexa, Fire Stick and Echo; building out its distribution network even further; facilitating assisted e-commerce and offering more services under its Prime membership. In fact, its global membership programme, Amazon Prime, is all about increasing the transaction frequency of its customers and it has signed on 100 million consumers worldwide. In the US, studies show that Prime subscribers spend more than the average customer, order more frequently and spend less time shopping on other websites. Amazon launched the program in 2016 at an annual subscription of Rs.499 and it has been a great success with nearly 10 million subscribers signing up. “While Amazon is using Prime and content to increase customer interaction on its platform, Flipkart is using payments and fashion,” says Kumar of KalaGato. For Amazon, India remains an important market with the company already earmarking an investment of $5 billion since 2013. Jeff Bezos in his recent annual newsletter said that India is the fastest growing market for Amazon worldwide.  In 2017, Amazon managed to close the gap with Flipkart even further with a market share of 31%; Flipkart was barely ahead with a 32% share according to Forrester Research. On a consolidated basis, however, Flipkart is comfortably ahead after adding the marketshare of Myntra and Jabong at 5% and 2.5%. The Indian e-commerce platform, whose value is currently pegged around $19.7 billion, is expected to touch $73 billion by 2022, about 5.7% of the overall retail market, according to Forrester Research.

No wonder then that Amazon didn’t want to let Flipkart go without a fight. The largest online retailer in the US is also said to have thrown in its bid to pick up a majority stake in Flipkart. Apart from offering a similar valuation of $20 billion, Amazon has also supposedly offered a break-up fee of $1-2 billion in its negotiations to acquire a significant stake in Flipkart. Amazon refused to comment on its possible bid for Flipkart.  But it isn’t worried about Flipkart going Walmart’s way. Amit Agarwal, country head of Amazon India, stated in an interview with a business daily that Walmart becoming an investor in Flipkart would be good for the overall e-commerce market in India. “I would rather have two or three well-funded players going after (expanding the market) than us doing it alone,” he said. According to him, the $5 billion investment committed so far only shows Amazon’s intent and the world’s largest online retailer will continue to significantly invest to fuel its growth in India.   

Even as the e-commerce market is all set to get re-energised with two equally strong players, many say the entry of Reliance into the space will shake things up for the incumbents. Reliance’s telecom arm, Jio, already has over 135 million subscribers and the company is looking to leverage that significant customer base to kickstart its online foray. The company is working with kiranas and consumer brands to create a model that will enable shoppers to use digital coupons through their Jio platform to buy products. While pilot projects are being done in cities such as Mumbai, Chennai and Hyderabad, a larger rollout is being planned next year. “I think things will start to get even more interesting when Reliance starts to make a significant investment in the e-commerce space. It is not here to provide cheap bandwidth so that Amazon and Flipkart can do more business. It has already been acquiring media and education content companies and how it scales its online presence will be the thing to watch out for,” says Sahni of Wazir. Reliance already has an offline presence through its retail arm, Reliance Retail, which clocked a revenue of about Rs.34,000 crore in FY17 from 3800 stores across the country. Already AJIO, the company’s online fashion store, which delivers across 12,000 pin codes, is seeing good traction with a multi-fold increase in orders and traffic, with a 60% increase in customer base in one year. It has a presence in about 200 stores and hopes to emerge as one of the largest e-commerce players in the country by 2020.

For Flipkart’s investors, who to align with is a happy problem to ponder upon. Walmart is said to be close in clinching the deal and will pick up a majority stake after negotiating with Flipkart’s investors including SoftBank and Tiger Global.  While the terms are still being chalked out, all of Flipkart’s early investors are expected to exit the company with SoftBank going for in for a partial exit as it allows them to showcase a great return generated on an investment in less than a year. “Flipkart’s investment from SoftBank’s Vision Fund comes with a promise to generate 40% IRR for its investors. A partial exit at these levels would look good on their report card,” says a former senior executive at a SoftBank portfolio company.

A majority of start-ups in India haven’t been able to raise enough capital to stay in the business. But Flipkart, rather its investors, had fundraising down to an art form. Maybe that’s what Walmart and Amazon didn’t anticipate. Both of them could have had Flipkart at a much cheaper valuation some years back because there aren’t any alternate assets that are as attractive in India. For Walmart, it is the quickest way to gain scale in India and for Amazon, a win will give it complete domination in a market that  is becoming increasingly important for it. But the true winner in this deal is clearly Flipkart and its investors. It is a scenario neither of them would have envisioned when the funding tap went dry in 2016. Unlike Snapdeal, where no one emerged a winner, Flipkart has managed to create value for all its stakeholders in the end.