The great global retail battle has now truly arrived in India. Walmart closed a deal last week to buy Flipkart for $16 billion. Rival Amazon was also interested but perhaps lost out because it could have run into trouble with Indian competition regulations. Amazon promptly announced after the Flipkart sale that it would be pumping an additional Rs2,600 crore into its India operations.

The past few years have seen the boundary between traditional retail and online commerce dissipate. Companies have tried to provide consumers with an integrated experience. Walmart made the first move when it paid $3.3 billion for start-up Jet.com. Amazon followed with a $13.7 billion deal to buy Whole Foods Market, a chain of brick-and-mortar stores. The emerging India battle should be seen in this context. It is significant that Walmart has made a big bet on an online retailer like Flipkart.

Corporate strategists are torn into two camps over an existential question. Who is more likely to succeed—the traditional retailer that has moved online or the online retailer that has bought physical stores?

India is now likely to be one of the arenas where this question will be answered. Financial data does offer some clues. Walmart is far bigger than Amazon in terms of sales but is dwarfed by the online retailer when it comes to market capitalization. What this means is that investors are betting that future growth lies in the online world.

The more immediate problem is that online retail is not yet profitable. Flipkart is no exception. It is, thus, not surprising that Walmart shares lost ground on Wall Street soon after the deal was announced.

The gurus of Retail 2.0 often bring another element to complement the need for a modern retailer to have both a physical as well as an online presence. That third element is payments. The whole fashionable idea of omni-channel retailing is built on this triad of physical stores, online presence and proprietary electronic wallets. That is why the Alibaba-Paytm combination also needs to be watched. India is a country of mobile phones—and it should not be forgotten that there are Indian corporations such as Reliance Industries and Bharti Enterprises that have investments in mobile telephony, mobile payments and retailing. The strategic triad will be held together with robust supply chains, data analytics and customer services.

What now?

The Flipkart sale means that smaller online retailers could be in danger of getting trampled during a messy fight between two giants with financial firepower. The old problem of the impact of retailing innovation on neighbourhood kirana stores could crop up once again.

In the language of technical economics, the regulatory challenge is not of monopoly but monopsony. The retailing giants are known the world over to drive down prices of their supplies. There is a big opportunity as well: Modern retail chains could become pipes to carry Indian goods to foreign markets, depending on how the Indian operations are integrated with global operations.

Some Indian retailers complain that Walmart has used the deal to get a backdoor entry into a market that still imposes restrictions on multi-brand retailing. This could be a lightning rod for protectionist sentiment. Indian regulators need to realize that the artificial division between physical stores and online stores is fast becoming meaningless. India needs to take an integrated look at retailing—and there will continue to be political concerns given the jobs at stake in both kirana stores as well as in retailing supply chains.

India saw heated debates around a decade ago on whether organized retailers should be allowed to enter the country. That debate has now died down. More attention is paid these days to who owns the big retailers who are creating a new consumer culture. The most apt observations in such situations come from Joseph Schumpeter, the prophet of creative destruction. He wrote: “In capitalist reality as distinguished from its textbook picture, it is not (traditional) competition that counts but competition from the new commodity, the new technology, the new source of supply, the new type of organization."

The entry of large, integrated, multinational retail chains into India needs to be seen in this context. Their presence will shake the traditional way of doing things. Their record of using their heft to drive down prices as well as destroy competition cannot be ignored either. But such modern retail will eventually also boost productivity as well as create new jobs, even as smaller stores use their traditional locational advantages to innovate. These are some of the longer-term issues that matter as far as the coming retail battle is concerned.

How will the entry of Walmart in online retail affect the neighbourhood kirana stores? Tell us at views@livemint.com

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