May make sense for Walmart to walk away from India market: Morgan Stanley

May make sense for Walmart to walk away from India market: Morgan Stanley
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Bengaluru, Feb 5: Financial services firm Morgan Stanley has said that “it may make sense” for Walmart to potentially walk away from the India market if the US retail giant can’t see a long-term path for profits, like “Amazon did in China.” It said, new e-commerce regulations in India increase the cost of doing business and add to the uncertainty over Flipkart losses.
“An exit is likely not completely out of the question with the India e-commerce market becoming more complicated,” said Morgan Stanley, in a report ‘Assessing Flipkart Risk to WMT EPS.’ “There is a precedent for an exit as Amazon retreated from China in late 2017 after seeing that the model no longer worked for them.”
In May last year, US retail giant Walmart agreed to pay $16 billion for about 77 per cent stake in Flipkart, a transaction that valued the homegrown e-commerce company for over $20 billion. The deal has also pitched Walmart, the world’s largest retailer, in direct competition with its US rival in a battle for dominance in India’s online retail market.
“Given this, we do not think Walmart will step away from India. We think Walmart will conform to the new regulations and try to determine a strategy to reach profitability over time,” said Morgan Stanley.
It said, the changes “do increase the cost of doing business” and open up the India e-commerce market, but Flipkart remains one of the largest platforms in the country and has the potential to be a long-term winner.
On December 26, 2018, the Department of Industrial Policy & Planning outlined a set of guidelines and conditions for e-commerce marketplaces operating in India. Among others, the new rules stipulate B2B sales between the wholesale arm of the marketplace and the seller are restricted to 25 per cent; no marketplace can own equity in a vendor; and a marketplace can’t mandate vendors to sell products on its platform exclusively.
Morgan Stanley said the proposed regulation could meaningfully disrupt the business models of both Flipkart and Amazon. The new rules are intended to foster a more level playing field between small and large vendors on e-commerce marketplaces. They would negatively affect both Flipkart and Amazon given that the vast majority of their sales (reportedly 70-80 per cent) are said to be coming from “preferred sellers” which are companies that Flipkart and Amazon have equity stakes in or do a significant amount of B2B transactions with, and this practice would be disallowed under the new rules. Flipkart and Amazon also offer a significant amount of exclusive deals, particularly in smartphones, which will be disallowed under the new rules which came into effect on February 1, 2019.