Walmart exited the British grocery market after taking a loss of $400 million, almost a decade after entering it. After the giant in the US retail market had bought into the business of ASDA, a homegrown British company, in 1999 for $11.4 billion, it had thought that its entry across the “pond” (Atlantic Ocean) through that route would give America-headquartered an edge.
Instead, it had to lose money in the current merger with Sainsbury (the second largest retail grocery chain) of the United Kingdom, though Walmart would still have to retain a mandatory 42 per cent of its stake in ASDA, along with taking in cash worth $4.1 billion. Barring that kind of liquidity – Walmart always enjoyed in this “cash and equity” sale – would the Arkansas-based world’s largest retail chain feel overjoyed due to the deal? Or does this kind of “Brexit” (as the Wall Street Journal called it by the term) prove the axiom that Walmart can only succeed in controlled environment where it enjoys virtual monopoly and where it is cross-subsidised by the domestic authorities? This week’s purchase by Walmart of Flipkart, an Indian-owned and India-based online-only retailer needs to be seen in those lines.
Let us address each of the five fears about the retail behemoth’s entry into Indian markets, albeit delayed by 12 years (the corporate had declared in 2007 that is seeking a partner to enter into India) one each at a time.
Knowledge of local market
First, what guided their choice of Flipkart? The Indian start-up had grown as one of the first successful e-commerce site founded by the two Bansals who developed all the infrastructure they needed for futuristic growth of their business and had all the connectivity nodes in their algorithms that catered to match that of the Amazon. Over the years, they have developed the data-sets that described the consumption profiles of millions of Indians, manage inventory tightly through supply-chain management systems that have matured by now; and eventually provide customer satisfaction for the forward sales and services, besides have back-end operations that match customers’ happiness with the ease of doing business for its suppliers who provide after-sales service.
So, as these are attributes of qualitatively global standards, by buying into all this, Walmart would be hitting the ground running. In other words, when Walmart hits local markets with Flipkart’s own heterogeneous uniqueness, it would have a robust information technology system that has been tried and tested for local conditions. This should remove the fear of Flipkart’s valuation, estimated to be about $18-plus billion, to be stripped of its capacities built by two young IIT graduates.
Effect on small traders
The second fear is about market access of the smaller operators – local kirana shops, besides vegetable and non-vegetable sellers or any other small sellers of victuals. A research paper, about a decade old, titled “The Causes and Consequences of Wal-Mart’s Growth” and written by Erin Basker, indicated that there is usually an upsurge in general retail activity when a Walmart store opens in “county” or maybe a district. This increase in demonstration effect-led growth, while validating free market principles, also disturb the previous equilibrium.
Till the new equilibrium is established is the time when the smaller players grow, the overall consumer acceptability increases with rising consumer satisfaction. Basker had quantified the rise in overall business from available data till 1988-1997. In his estimation of market behaviour of retail sector of the US economy, Basker quoted Panle Jia of Massachusetts Institute of Technology, who wrote a paper in 2005. Prof Jia had observed, “The large chains’ entry behaviour is assumed to depend on local economic conditions and anticipation of the decisions of competitors (both large and small) as well as on an incentive to locate stores in nearby markets to reduce costs. Small stores’ entry decisions are assumed to be based on the observed entry of each of the large chains.”
On the other hand, Basker relates to Jia found, “[O]n average, a county is served by two or three fewer small general merchandise stores, such as the dollar and variety stores, if Wal-Mart or Kmart enter it than if either of these large retailers stays out.”
The third fear is about Walmart’s labour policies. The global number one retailer has an aggressive dislike of trade unions. Typically, when Walmart opens a store in a high unemployment area of the USA – this writer suggests that whole of our markets can be considered to behave similarly as economically backward US areas – they recruit several hundred workers of the area. But typically, they would get applicants in much larger numbers – in, say, multiples of five. So the bounce this phenomenon provides to employment statistics is significant.
Still, besides the bias for non-unionised labour, there are charges that Walmart tends to pay less. Allegations remain that labour gets subsidised through social security system even after holding a paying job, or shall we say, a job that should have paid them enough for those sections of labour top come off welfare rolls.
This argument was noted significantly when former US presidential race candidate and retired senator Bernie Sanders raised this point, thus throwing a harsh light on the issue that the Arkansas-based corporate is not providing even the minimum wage level of $15 per day.
It would be pivotal to see what Walmart does in this country where the labour policies of enterprises have become really elastic, and “unregulated”. Of course, it is a given that the US-based retailer sees huge profit margins, with the wages in the country not being anywhere near even the depressed levels they were in the US, but will it need the apparently anarchic labour market to maximise its profit?
The fourth fear is about how it will use the available database of Flipkart to get it an entry into the Indian market. How would it use the Flipkart platform to maximise its gains? Will this give it such an overwhelming edge in the domestic market that it will enhance the pain of the homegrown brands like Spencer’s or Reliance Fresh or any other retail brand? The demonstration effect that has been described will deepen the market. But, will it increase the visitor flow on the retail section of the shopping malls that have mushroomed all across the country and thus occupied valuable real estate without deepening the buying behaviour unique to an Indian and a Chinese consumer?
Walmart was the first retailer in the US to seriously harness information technology for expanding its competitive advantage over other competitors. It used the power of its customised IT tools to manage intricately entwined supply chain and also its inventory management. As larger share of the consumer pie came its way, it began keeping large inventory. And slowly as technology developed it was the first to use radio frequency identification system (RFID) tags on its commodities so as to measure their journey from the farm to the bagging section of the sold good.
This is where the last and fifth fear dwells. The formidable reputation Walmart had for exploiting any laxity the authorities showed to it was evidently reflected in its top line profits. Be it the tax breaks it got or the governments’ cross subsidies it received on some account head — irrespective of which it could pass on to its consumers or did not think at all in those terms — all of these factors could shore up its bottom-line and thus prove the point that it is not just a profiteer, but it has definite impact on the economy that is positive.
Well, there are whole bunches of questions that this deal which the Telegraph newspaper of Kolkata rather eloquently titled WalKart can be emblematic of the Prime Minister Narendra Modi’s winning formula the second time around. For that, Walmart will have to go on a store opening binge in the two most poor states of the country – Uttar Pradesh and Bihar – before May 2019, when Parliamentary polls become due. A victory for Modi’s Bharatiya Janata Party will also mark what brought him to victory. Will it be the Mandir-Cow politics or is it the “economy, stupid!”.