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In a deal which values the retailer Flipkart at a little under $21 billion, Walmart (NYSE:WMT) today announced it has reached agreement to purchase a 77% stake in India’s Flipkart for $16 billion, sealing a major win for the traditional retailer over its competitor Amazon (NASDAQ:AMZN) which had also been pursuing a deal. For those unfamiliar with the company, Flipkart is one of the leading retailers in India, a country with a population of over a billion people and a fast growing shift to online shopping. Amazon is the other leader in India and had been seen as the favoured suitor for Flipkart by major shareholder Softbank (TYO:9984), however a consolidation of the two would give the combined group about 70% of the Indian digital retail market which would have likely faced stiff opposition from competition regulators.

The theory for now is that India, with its sizeable population, single regulatory environment (something that obviously exists in the US, China and the EU), rapidly growing economy and general shift towards the burgeoning digital ecosystem, this will be a major growth play for Walmart which has struggled to make significant inroads into the digital world against Amazon and Alibaba. This isn’t necessarily going to be all smooth sailing though, India still has a significant way to go to make its population fully addressable in the digital age and Flipkart, despite its size is still a loss maker with 2017 revenues of about $3 billion leading to a loss of $1.3 billion for the year.

As we’d expect though, Walmart has its profitable operations and can afford to take a hit on profitability to grow. Flipkart grew about 29% year on year in 2017 and the expectation is obviously that it will grow its way out of making losses, something which is quite feasible given the sustained economic growth rate in India (GDP grew by about 7% per year for the last decade).

Flipkart Deal – Walmart Pretty Agile for a Big Player

Just a few weeks ago, Walmart agreed a sale of its Asda supermarket business in the UK to Sainsbury’s after a somewhat disappointing almost 20 years of ownership. Back then, the route to growth was seen as expansion into international markets, the mistake of course was that expansion into other markets by acquisition of relatively mature businesses in a relatively mature market is of course a much harder slog of a battle than incursions into (relatively) greenfield markets like digital in up and coming economies like India.

So completes a few week turnaround of a sale and an acquisition. It’s unlikely that the two deals were unrelated and of course at the senior levels within Walmart, this would have been the ultimate game plan when the Asda sale was planned, but the move still shows that the world’s largest company by revenue (even Apple is dwarfed by Walmart in that category) has some fancy moves up its sleeve. Although it hasn’t made as much headway against Amazon in the online retailing space as it would have liked, this is a route to turbocharging those operations, particularly given that the battle for online retail in major established markets like the US, China and Europe has largely been fought and won/lost depending on your perspective.

Whoever has emerged as dominant in those regions will not likely be dislodged without significant time and investment from competitors, much like the Asda story in the UK, you can change perceptions and habits, but they take time. Forming new ones is much easier and this is clearly the bet Walmart is making with its Flipkart play in India.

Flipkart will hit Walmart Earnings

The situation isn’t all roses, Walmart as part of the announcement said that the acquisition will hit full year earnings per share by between 25 and 30 cents for 2019 if the deal completes in the 2nd quarter of the fiscal year but this will be seen as the short term pain for the long term gain. Walmart recently missed in its February earnings as online growth stumbled given the challenges Walmart faces against the likes of Amazon. The company needs to shift to an online model and Flipkart can help it do that. It has 100 million users on its platform apparently in a country of over 1 billion, that’s a lot of room for growth and it’s not like all of those other 1.2 billion are using Amazon. The digital infrastructure in the country is sparse but improving. Having a major stake in a major retailer is a route to the hearts and minds of many of the others.

The ultimate goal Walmart has stated is to get Flipkart to the point where it can publicly float as a subsidiary. It may want to get closer to breakeven before it considers that possibility but in the meantime, it has likely given investors what they want, a route to significant growth into a major market in a digital fashion, not with brick and mortar store investments and costs which hit the bottom line.