Should Walmart buy Flipkart?

Walmart’s (NYSE: WMT) acquisition binge has taken a questionable turn. The company is expanding its footprint in India.

The American retail giant is discussing buying more than 40% of the Indian e-tailer Flipkart, Reuters reported. No terms of the deal were available, but the Flipkart move might cost Walmart as much around $4.6 billion. Reuters estimated Flipkart’s value at $12 billion and 40% of that sum is $4.6 billion.

Bengaluru-based Flipkart was founded in 2007 by Sachin Bansal and Binny Bansa as an online bookstore. The company now sells a wide variety of merchandise including appliances, furniture, digital music, electronics, and mobile phones through an online portal.

Flipkart generated around $3.1 billion in revenue in 2017, and employs 33,000 people, a Wikipedia entry indicates. Its subsidiaries include eBay.in (eBay in India), Myntra, Jabong.com, Phone.Pe, EKart, and Jeeves.co.in. Although Flipkart is primarily an Indian company some of its assets are apparently registered in Singapore.

Why did Walmart buy Flipkart?

It is not clear exactly why Walmart bought Flipkart but the world’s largest retailer has been struggling lately.

 

Its year-to-year net income fell by 42.34% during third quarter 2017, dropping to $1.75 billion, Google Finance data indicates. During the same period, Walmart’s year-to-year net profit margin fell by 44.75% to 1.42%, and its year-to-year operating income fell by 4% to $4.91 billion.

Despite that Walmart has experienced some growth; its’ year-to-revenues grew by 4.23% to $123.18 billion during third quarter 2017. The year-to-year cash on hand grew by 18.3% to $7.03 billion which gives Walmart lots of opportunity for acquisitions. The hope is to generate more income by adding higher-income customers with more buying power to Walmart’s ecosystem.

Walmart’s Acquisition Spree

Walmart has been trying to make up for the decline of brick and mortar stores with a spree of digital acquisitions. Some of the most notable purchases include:

• Jet.com – a U.S. online discounter headed by Marc Lore for $3 billion. Lore is now president and chief executive of Walmart eCommerce USA.

 

• ShoeBuy (Shoes.com). A bargain basement Zappos clone aimed at female shoppers.

 

• Outdoor retailer Moosejaw.

• Men’s’ fine clothing retailer Bonobos.

 

• Modcloth. A fashion website aimed at younger unconventional women.

 

• Logistics startup Parcel. Parcel is a same-day last mile delivery service in New York City. Parcel has delivered more than one million meals, and it also delivers meal kits. Jet is experimenting with same-day delivery of some items in New York.

 

• “We plan to leverage Parcel for last-mile delivery to customers in New York City – including same-day delivery – for both general merchandise as well as fresh and frozen groceries from Walmart and Jet,” a Walmart press release states. Walmart has described New York as its top market.

• Heyneedle. A specialty retailer based in Omaha Nebraska, similar to Jet.com but focused on housewares.

If all that was not enough Walmart has created a startup incubator called Store Number Eight; which is working on a number of next-generation retail initiatives including Project Keplar a store with no cashiers, Recode reported. There’s also Code Eight which is described as a “personal shopping service for rich moms in New York City.”

Does Walmart have a Strategy?

The concern investors should have is that Walmart lacks a strategy. Instead, it is mindlessly trying a number of approaches to see what works.

The advantage to this piecemeal approach; which is similar to Amazon’s (NASDAQ: AMZN) is that Walmart might stumble on a trillion dollar idea. It also diversifies risk and helps the company build up a number of areas of new expertise.

The disadvantages are a lack of focus and the potential to waste a lot of money real fast. Another obvious risk is a lack of focus on Walmart’s core business and the fast-growing Walmart.com.

One interesting aspect of the strategy is the urban focus. Walmart has historically been a rural company based in rather remote Bentonville, Arkansas. The rural focus gave Walmart a large customer base that was ignored by competitors, and early experience with new patterns of shopping.

That focus is a disadvantage in an increasingly urban America, where Walmart is facing stiff competition from Amazon on its rural home-turf. Hiring Staten Island native Lore, and focusing on New York is a means of catering to the new America. A major goal of Walmart is to reach younger, Millennial and Generation Z shoppers (persons under 35) who are more likely to live in urban areas and disdain traditional shopping.

Walmart is searching for a way to reach more affluent urban and younger customers which it needs desperately because its core market of Baby Boomers is moving towards retirement and death.

The Aging of the Baby Boomers Threatens Walmart

Walmart’s core demographic is Baby Boomers persons (between 54 and 72) who are America’s second largest generation. They drove the company’s big expansion in the 1980s and 1990s and made Walmart part of American life.

The aging of Baby Boomers is problematic because people tend to buy less as they age. They don’t have growing kids and are less likely to have a house to maintain. What should really frighten Walmart is how broke Baby Boomers are or will soon be.

Only 55% of Baby Boomers have some retirement savings, the Insured Retirement Institute estimated. Around half of those people will end up living on Social Security, that’s bad because the average Social Security payment was around $1,360 a month in 2017. The good news for Walmart here is that it will have plenty of applicants for greeter and other jobs in the foreseeable future.

These statistics are bleak for Walmart because they indicate a large percentage of its customers will have a lot less money to spend real soon. To make matters worse, an increasing number of them will be dying off.

Since there are currently around 74.9 million baby boomers in the USA, Walmart needs to launch an aggressive push to get younger customers now. Fortunately, the company has launched such a push now.

That makes investing in India, which has a growing middle class a wise move for Walmart. The company needs to expand its markets and the market may not be in the United States.

An interesting opportunity Walmart has is to apply all the online retail expertise and technology it is buying and developing in the USA to Flipkart. The Code Eight and Parcel business models being tested in New York might be applicable to crowded Indian cities like Mumbai and Kolkata than America’s wide open spaces.

Walmart is a Good Company

Despite the incoherent strategy, Walmart is responding to changes in American society and retail aggressively. That makes it a good value investment and a company that will survive for a long time.

Walmart is still on the cutting-edge of retail, which gives it an opportunity to thrive for a long time. That is good news for those seeking income stocks because WMT paid a 51¢ dividend in each of the last four quarters.

More importantly, Walmart’s dividend has been high and rising for some time. It was 50¢ in 2016 and 49¢ in 2016. Those seeking a good retail stock that pays a steady income will be well served by Walmart.

Buying into Flipkart was a smart move for Walmart. It also makes WMT a smart diversified investment in retail stocks.