Walmart has closed on its $16 billion deal to acquire 77% of the India-based e-commerce retailer Flipkart Group.
Walmart officials say Flipkart will give the company an opportunity to capture a big growth opportunity in India, although some financial analysts worry that the money-losing business could eventually cost resources and momentum in the U.S., where the big retailer last week reported its best quarterly comp growth in a decade.
“Walmart and Flipkart will achieve more together than each of us could accomplish separately to contribute to the economic growth of India, creating a strong local business powered by Walmart,” said Judith McKenna, president and CEO of Walmart International, in a statement. “Our investment will benefit India by providing quality, affordable goods for customers, while creating new skilled jobs and opportunities for suppliers. As a company, we are transforming globally to make life even easier for customers, and we are delighted to learn from, contribute to and work with Flipkart to grow in India, one of the fastest-growing and most attractive retail markets in world.”
In a presentation at Walmart’s Shareholders Week event earlier this year, McKenna emphasized that in Flipkart, Walmart is getting more than an e-commerce site – it's an “ecosystem,” including a unique payment app and a logistics arm.
Walmart said the Flipkart investment will transform its position in a country with more than 1.3 billion people, strong GDP growth, a growing middle class and “significant runway for smartphone, internet and e-commerce penetration.” As it scales in India, Walmart said it will continue to partner to create sustained economic growth across agriculture, food and retail.
Flipkart’s existing management team will continue to lead the business. Tencent Holdings Ltd. and Tiger Global Management LLC will remain represented on the Flipkart board, in addition to independent board members, and will be joined by new members from Walmart. The board will work to maintain Flipkart’s core values and entrepreneurial spirit, while ensuring it has strategic and competitive advantages, the company said.
“We are poised and ready to deliver the full value of this partnership for India,” said Binny Bansal, Flipkart’s co-founder and group CEO. “By combining Walmart’s omnichannel retail expertise, supply-chain knowledge and financial strength with Flipkart’s talent, technology and local insights, we are confident that together we can drive the next wave of retail in India.”
Walmart’s investment includes $2 billion of new equity funding to help accelerate the growth of the Flipkart business. Both companies will retain their unique brands and operating structures in India.
Walmart reiterated financial guidance made at the time of the deal announcement, indicating a negative effect of 25 to 30 cents per share on its current fiscal year earnings. The company said additional investment in India during its coming fiscal year could exert earnings pressure of about 60 cents per share.
Some analysts sounded caution, pointing out that while U.S. store momentum is strong, heavy investment in e-commerce continues to weigh on profitability at Walmart.
“[W]e wonder whether the e-commerce beast and its losses will exert more pressure on the U.S. operations over time,” Wolfe Research analyst Scott Mushkin said in a recent note to clients. “At this stage, however, given how strong Walmart’s business is and the robust U.S. economy (particularly in core Walmart markets), investors appear willing … to look through the generally declining EBIT for the overall enterprise.”