Buying Flipkart was the easy part – the real test for Walmart starts now

It took Walmart a decade of struggles – including a failed partnership and policies that marginalised it – to finally get a real shot at India’s booming e-commerce market.

But the world’s largest retailer’s real test in India may have only just begun.

On Wednesday, Walmart said it will buy a 77% stake in leading Indian e-commerce firm Flipkart for $16 billion (over Rs1 lakh crore). While the Bengaluru-headquartered company will retain its brand and operating structure, Flipkart will work closely with its new parent going forward.

“With the investment, Flipkart will leverage Walmart’s omni-channel retail expertise, grocery and general merchandise supply-chain knowledge and financial strength, while Flipkart’s talent, technology, customer insights and agile and innovative culture will benefit Walmart,” the American company said in a statement.

However, India poses some serious challenges, which all e-commerce players have struggled with for years. Despite Walmart pouring in the big bucks, Flipkart’s bleeding business still has no escape from battling the issues that are particular to its homeground.

A small pie for now

Even as India’s internet users are expected to surpass 500 million by the end of this year, online shoppers will continue to be a small share of this population. Consumers remain wary of shopping online because of trust issues as well as the inability to physically feel a product before purchasing it. After all, people have reportedly received bricks and soap bars instead of the phones they ordered online.

In 2016, e-commerce comprised a mere 2% of the country’s overall retail trade. While the share of online retail is expected to double by 2026, it will still be just 12%. And vying for that small pie, alongside Walmart, is its fiercest rival Amazon.

But there’s lot of headroom for growth. The high cost of real estate space in urban centres is resulting in “smaller, cramped stores that are unable to offer the wider assortment available in online stores,” Kartik Hosanagar, a professor of technology and digital business at the University of Pennsylvania’s Wharton School, told Quartz. “In rural areas or small towns, people are exposed to all the products on TV but many of them are often not carried in local stores.”

That gives e-commerce players good odds to play with. Moreover, Flipkart holds around 30% of the Indian e-commerce market, with leadership in some important categories like mobile phones and fashion apparel. It has also built strong capabilities around logistics and digital payments, which are key to an e-commerce company’s success.

Entry amid bloodbath

Despite entering India five years after Flipkart’s debut, Jeff Bezos’s Amazon has already beefed up its business, pumping in over $5 billion into its Indian unit. The two companies are now neck-to-neck in the battle for dominance.

Flipkart, which has resisted Amazon’s onslaught for the last five years, has accumulated losses of over Rs 24,000 crore ($3.6 billion). The challenge of piling up losses is not something that can be solved anytime soon, regardless of Walmart’s deep pockets, because the price war with Amazon will continue.

Walmart recognises this situation. “If we were looking at this company with say a three-to-five-year horizon we would invest in the US and protect the core and maybe consider not doing other things,” Walmart CEO Doug McMillon said on an analyst call after the deal announcement.

Amazon is the biggest challenger, but not the only one. Digital payments major Paytm, backed by Japan’s Softbank and Jack Ma-owned Chinese internet giant Alibaba, is also looking to expand its play in India’s e-commerce sector. Add to that the vagaries of a developing economy, like nascent payment mechanisms and weak logistics infrastructure. In the US, for instance, average truck speeds can touch nearly 90km per hour whereas in India, it’s far slower at 12 km, owing to bad roads and troublesome red tape.

Money isn’t everything

Walmart’s bid to become a frontrunner in India’s online retail market didn’t come cheap. Of the $16 billion Walmart spent, only $2 billion will be funneled into Flipkart’s business. But throwing money around isn’t going to solve everything.

All three players – Flipkart, Amazon, and Paytm – now have deep coffers. But, experts say, the growth from competitive discounts won’t be sustainable. Snapdeal, which was backed by giants such as Softbank and Alibaba, is a case in point after the New Delhi-based e-commerce company’s slide over the last year.

So, Walmart’s best bet would be to marry its own strength – brick-and-mortar – with Flipkart’s stronghold on e-commerce, said Ankur Bisen, senior vice president for consumer and retail at consulting firm Technopak. Walmart India already operates 21 Best Price cash-and-carry stores, with plans to open another 50 outlets. And more than 95% of sourcing from these stores comes from India, aiding suppliers and creating skilled jobs. “This shows they’re ready to customise their businesses, that they’re responsive to India’s needs,” Bisen added.

If they’re equally flexible about developing India-specific models within Flipkart, they could have a shot at success. That will take time, innovation, and new ideas – not just money.

This article first appeared on Quartz.