Why Wal-Mart Is Investing In Growth In India

The dominance of Wal-Mart (NYSE: WMT) in the U.S. is well established, but the retail giant has yet to prove itself in many foreign markets. To that end, Walmart recently announced that it would pay $16 billion to acquire a 77% stake in Flipkart, India’s biggest online retail company, to make further inroads into the fast-growing market. This deal is believed to be the world’s biggest e-commerce deal as well as the largest for the U.S. retailer.

E-commerce currently accounts for only around 4% of Wal-Mart’s total revenue, but the company has been investing heavily in its e-commerce initiatives in order to remain competitive in the Amazon (NASDAQ: AMZN) dominated retail market. This is even more relevant now that traditional retailers have to compete with Amazon in the grocery space as well, in addition to its e-commerce business, due to its acquisition of Whole Foods.

Why The Focus On India?

India is the second most populated country in the world, with over 1.3 billion people. The country’s retail market is largely untapped by many major chains, and is primarily comprised of smaller local retail stores. Being a developing economy, India has a huge scope for improvement in supply chain operations and offers a platform for growth in discount retailing because of the relatively lower (but growing) average disposable incomes, lifestyle changes in the middle class and increased digital connectivity.

Despite the sheer size of the retail industry in India, big box retailers such as Wal-Mart make up a small portion of the market. Wal-Mart has for years tried to make inroads into India but has remained confined to a cash-and-carry wholesale business amid tough restrictions on foreign investment. It currently operates only 21 such stores in India. The overall Indian retail market is expected to hit $1.8 trillion, from $650 billion in 2016. Of this, the biggest driver is expected to be food and grocery, expected to exceed $1 trillion by 2027 up from $420 billion in 2016. India is also expected to become the world’s fastest growing e-commerce market, driven by robust investment in the sector and rapid growth in the number of internet users. In fact, Indian e-commerce sales are expected to reach $120 billion by 2020 from $30 billion in 2016. This presents a significant growth opportunity for Wal-Mart. Amazon, on the other hand,  has also committed investments to the tune of $5 billion for its operations in India.

What It Means For Wal-Mart

Wal-Mart saw its stock gain nearly 50% in 2017, but it is now down more than 15% year-to-date as of May 30. Much of the stock decline was due to the slowdown in the company’s e-commerce growth in the fourth quarter, to 23% y-o-y from levels of 60%+ in the first quarter of 2017. Going forward, we expect the company to grow, albeit at a slower pace than in 2017, as it continues to invest in its people and technology. However, the value addition of Wal-Mart’s expansion in India will likely be relatively minimal in the short term. This is because Walmart does not have a large enough presence in India as of now to benefit substantially from the Flipkart deal, and while Walmart also announced that it would be opening 50 new stores in India right after the Flipkart deal, traffic may not increase substantially at its brick and mortar stores due to the deal. Still, it is likely to have a significant impact on company’s financials in the long run due to the sheer size and growth potential of the Indian market.

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