Can Walmart-Flipkart look beyond a “dark” future in India?

Immediately after the acquisition, Walmart’s share price has taken a sharp fall. Analysts all over the world are unanimous that the deal makes “zero sense” and have predicted dark days ahead for the company.

While these fears might well be true and justified for Walmart as a public-listed company in the US, at least from India’s perspective, they are largely irrelevant. Walmart’s share price and its performance in the US is of limited import to the rest of the world. The more interesting question is what does the future hold for Walmart-Flipkart in India. The answer to that can also be summed up in one word.

Dark.

But not the same metaphorical “dark” as with Walmart’s stock price. This is a far more literal dark. Specifically, it refers to Walmart’s focus, on dark stores and dark warehousing to drive the next phase of Flipkart’s growth.

How does this work?

As we had pointed out in last week’s story, the government’s Foreign Direct Investment (FDI) policies had hitherto denied Walmart the opportunity to participate in a meaningful way in the Indian retail market. Acquiring Flipkart, technically classified as an online marketplace and hence allowing 100% FDI investment, gives Walmart a back-door entry into multi-brand retail.

However, this entry comes with conditions, specifically around disallowing branded physical stores, which is one of Walmart’s key strengths. Dark stores and dark warehouses allow Walmart an alternative way to cater to the Indian market without all the legal and regulatory hassles. These dark stores are like front-end shops in every major way, but with one big difference – they are not allowed to sell goods to customers who physically come to these stores and are not allowed to have any kind of branding or advertising at the store location (hence the use of the term “dark” to describe them).

The upside though, is that unlike front-end stores that require a lot of permissions, dark stores are not regulated as stringently. In Walmart-Flipkart’s omnichannel strategy, orders are placed online and they are fulfilled from the closest dark stores in the shortest amount of time possible. The convenience of online ordering meets the speed and near real-time fulfilment of offline stores.

So, let’s see how this plays out by answering a series of pointed questions.

Why are dark warehouses/stores important to Walmart-Flipkart?
The entire value proposition of dark stores and dark warehouses is sharpest for one particular type of retail goods—groceries and food items.

There is a growing belief that the online groceries segment, which is a small market today, will grow significantly in both absolute and relative terms over the next three years. As we pointed out in our story earlier this week, the online grocery business today is just a half-billion dollar sliver of the total $450 billion food and grocery retail business in India. And of the total $450 billion, less than 4% of the Indian food and grocery market is organised in contrast to the overall retail market in India where 10% of the pie is in the organised sector. So there is a lot of headroom, both in terms of the expected long-term shifts from unorganised to organised as well as from offline to online. Dark stores are the arrowhead through which Walmart-Flipkart will venture to bring this market both into the organised sector and online.

But aren’t dark stores bypassing regulatory guidelines?

No. This is something that many other companies are already doing. BigBasket is a classic example. It fulfils a lot of its orders from dark stores and dark warehouses. Amazon does the same for Amazon Now’s express delivery. Nothing stops Walmart-Flipkart from doing the same.

Why couldn’t Flipkart venture into groceries on its own?

Hitherto, Flipkart has had limited success with groceries. They tried it once, years back, but quickly abandoned plans and have only recently taken baby steps to re-enter the segment. So why is groceries a hard market to crack? These items are perishable with short shelf-lives, and the imperatives around supply chains, inventory management and logistics are completely unique relative to everything else that Flipkart has sold previously. It requires an entirely different mindset around operations, economics and user behaviour. Not only are these areas Walmart’s core strengths, but they already have a Rs 4,000 crore (~$588 million) cash and carry business in India where food items and groceries are a big part of the basket.

 

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