Who will win India’s promising market for internet commerce? A company with deep pockets and an almost limitless capacity to bear losses. Amazon.com Inc. fits the bill. Its investors don’t bat an eyelid when the firm announces large amounts of cash burn every other year.
It seemed like the US company had met its match when SoftBank Group Corp invested $2.5 billion in Flipkart last year. Led by maverick tycoon Masayoshi Son, SoftBank never seems to be short of funds or the appetite for taking wild risks.
Reports now suggest Walmart Inc. will replace SoftBank as the lead investor in Flipkart, although there is a chance Amazon may end up buying India’s largest e-tailer. Amazon’s talks with Flipkart suggest it wants to avoid a long-drawn battle with Walmart. This is understandable. Why fight Flipkart when you can own it and nearly eliminate competition?
But even if Walmart pushes its way through and acquires Flipkart, Amazon may still walk away with the prize of leading India’s e-commerce market. This is simply because Walmart’s investors may not have the same patience as Amazon’s to bear high losses for years.
The former’s shares fell sharply in February this year after delivering a disappointing annual profit forecast, Bloomberg reported. In a post-results call, one analyst even wanted to know if e-commerce losses had bottomed, as the company had previously suggested.
“The size of the prize in India is high, but it’s likely to take even more billions of dollars to remain relevant in India without a certain payoff and a time frame for that payoff. The company or companies that will win are those that have patient investors, willing to take the risk that in the long run this will pay off. Amazon has those types of investors. I’m not sure that Walmart does," Michelle Grant, head of retailing at Euromonitor International said in an interview. The fact that Walmart was in talks with Flipkart in 2016, but later backed off, suggests it is a tough sell to its investors, she adds.
In the past, Walmart has operated with negative cash flow as it expanded operations and grew in scale. Lately, it has been viewed by investors as a mature business, generating huge cash flows (see chart).
Amazon’s record with cash flow, on the other hand, has been erratic, with outflows in two of the last four years. What’s more, the big drop in Amazon’s cash flow in 2017 was met with a yawn by investors. The company and its investors didn’t discuss cash flow at all in its post-results call this February, with the focus clearly being growth.
“Even though Amazon’s losses in the international division mounted in 2017 because of India, it remains committed to the market," says Grant.
This commitment could either be in the form of a large investment in Flipkart now, in exchange for lower losses in the future, or billions of dollars’ worth of investments over the years to grow and establish a leadership position in India. Either way, its dogged pursuit of leadership in India may pay off.
Grant points out that the market shares for the largest five e-commerce markets show a pattern: “There is one dominant company followed by a relatively distant second and a lot of other smaller companies. It is likely that India will follow a similar pattern." From the looks of it, Amazon is set to dominate India’s e-commerce market, unless, of course, Walmart and its investors have a change of heart with regards to cash burn.