Walmart May Exit Flipkart Amid New FDI Rules: Morgan Stanley

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The new Foreign Direct Investment (FDI) rules which kicked in on February 1, 2019, have come as a huge jolt for the ambitious US-based retailer Walmart.

The behemoth had decided to join the huge Indian e-commerce feast barely a year ago by paying an astoundingly huge $16 billion to acquire a 77% stake in the Indian retail juggernaut Flipkart.

Walmart May Exit Flipkart

The global giant’s entry on the Indian scene was seen by many as a game-changer of the e-commerce scenario in the country but looks like it is not too pleased with the ride so far and does not see a long-term path to profitability in the wake of these new rules.

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“An exit is likely, not completely out of the question, with the Indian e-commerce market becoming more complicated,” said Morgan Stanley, a US based banking and financial services company, in a report dated February 4.

As the country gets ready to go to polls later this year, the new FDI rules are being said to be a part of the ruling party’s efforts to appease small time traders, whose businesses had been hugely affected by online sellers’ stranglehold over the Indian markets.

The new rules now forbid e-commerce companies from offering deep discounts, selling products from entities in which they exercise any ownership (direct or indirect) and from entering exclusive selling agreements with their vendors.

Within three days, the two stalwarts on the Indian scene, Amazon and Flipkart, had lost a third of their sales and $50 billion on market cap. Walmart shares fell sharply by 2.06% to $93.86 on the New York stock exchange, causing losses to the tune of $5.7 billion.

Two of Amazon’s top sellers, Cloudtail and Appario Retail, both of which are joint ventures of the Jeff Bezos owned Amazon, have already pulled back their products from Amazon to ensure compliance with the new rules.

Flipkart too might have to take nearly 25% of its products off its site keeping view these new regulations. The hardest hit will be the company’s smartphones and electronics category from which it gets almost half of its revenue.

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“We estimate that Flipkart derives 50 percent of its revenue from this category, meaning Flipkart could face meaningful disruption and top-line pressure in the near term,” said this report.

Walmart may exit flipkart

Facing major disruptions, the giants across this platform are already looking out for alternative routes to create subsidiaries which will enable them to carry on their businesses without violating the new policy guidelines.

Experts have already warned that finding workarounds and restoring listings might take as long as six to eight months.

Earlier in 2017, Amazonhad quit the Chinese market after burning its fingers there. So, if Walmart chooses to wash its hands off its Indian leg of operations, the move wouldn’t be exactly unprecedented.

The Morgan Stanley report too pointed to the same.

“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,” it said.

With the revenue growth rate also expected to half down to 15% in the coming months, will Walmart actually quit the Indian market for good, as suggested by this report?

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