Walmart-Flipkart combine faces uphill battle

As the euphoria settles on the biggest financial deal for either company — and as Sachin Bansal walks away a billionaire — Walmart and Flipkart have to contend with the truth that their battles may have just begun.

Mergers happen for all kinds of reasons but when companies come together largely to fend off an external threat (Amazon), history has shown that the movie does not always end well.

Walmart, the uber brick-and-mortar retailer, has shown to be the world’s most consummate and sophisticated operator of big box stores. Most Indian families in the US still shop at Walmart although their incomes are much higher than the core customer segment which Walmart caters to.

Price and selection, the attributes Amazon is famous for, have long been Walmart’s staple offering. Walmart’s mammoth supply chain and its feared buying department squeeze costs so much that no company could possibly procure items at a lower cost. Stories when manufacturers have had to yield down a penny on a $5 product are legendary in Bentonville, the behemoth’s world headquarters. All of Walmart’s major suppliers maintain ambassador offices in this town which, but for Walmart’s presence, would probably not even rate an airport.

And curiously, convenience is also a major reason shoppers go to Walmart. Most of the company’s stores operate on a 24x7x365 schedule with the exception of Christmas Day. There are so many stores around that there’s always a store near you.

Walmart has always looked at e-commerce through its innate strength — massive physical infrastructure — and this is why it is at least somewhat competitive with Amazon in the US. Customers could order a product online and have it shipped to the nearest Walmart store to pick it up, thereby saving on shipping fees. They could return items to the store without the hassle of having to pay to repack and ship them back, often during a regular visit to stock up on milk and groceries.

In India, Walmart does not have its trump card — a far-flung network of retail stores — so what exactly does it bring to the Flipkart marriage? Loads of cash, for sure, but having already spent $16 billion on a stake which it could have had for far less two years ago when Flipkart was really under a cash crunch, Walmart will struggle to earn a decent return on its investment. The company has already announced that it will take a $750 million charge next year indicating it may not be feeling very confident.

Walmart can bring its feared and vaunted logistics expertise to Flipkart and browbeat suppliers to further lower costs. But remember that even in India, the Big Three make money not from items sold from their inventories, which require an expensive warehouse and logistics machine, but from so-called “Marketplace” sellers, where third-party merchants use the Big Three more as an electronic platform to complete transactions.

No e-comm expertise

Walmart certainly does not bring in-house e-commerce expertise to the deal. Struggling to compete with Amazon, and knowing that its digital talent bench was weak, it acquired a small online startup Jet.com, only two years ago. And what was the single greatest accomplishment of Marc Lore, Jet’s CEO, who is now the head of Walmart's e-commerce division? He co-founded Diapers.com, Soap.com and Wag.com. Has anyone heard of these blockbuster companies?

Walmart’s e-commerce revenue in the last quarter of 2017, the busiest for US retailers, was weak.

And lest we not forget, Flipkart has had its share of woes. It was laying people off less than a year ago. It made structural changes to reduce costs, such as cutting travel and eliminating employee perks like reimbursed cab rides.

Part of the problem is that at its core, Flipkart’s vision has been to rely on loads of investor cash to offer deep discounts and acquire customers, assuming that the Indian consumer is cost-conscious above all else. But time and time again it has been proven that the Indian consumer holds “value” in much higher esteem than sheer bottomline cost.

The Walmart-Flipkart deal can only succeed if it can go one better against Amazon in end-to-end customer value. A concerted effort to help the customer through every aspect of the sales cycle, especially post-sale returns.

At Flipkart, trying to find an email address to write a simple message to complain requires a lot of work because the company takes extra effort to bury the contact form deep in its website.

If Walmart-Flipkart can implement a 24x7 customer service chat portal and a vibrant call centre staff genuinely eager to help — just like Walmart does in the US — it will be rewarded with customer loyalty. This alone could help it compete against Amazon — assuming of course that Amazon would, in the meantime, sit idly by. An uphill battle is definitely coming up.

The writer is the managing director of Rao Advisors LLC, Texas

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