Walmart tilts at windmills: Blames strict enforcement of marketplace model for its travails

Walmart chief executive officer Doug McMillon said it was disappointing that the Indian government had changed norms for foreign direct investment (FDI) in ecommerce without consultation and hoped for a more collaborative process going forward.

The government had in December 2018 tightened norms that came into effect on 1 February of 2019, prohibiting marketplaces from selling products of affiliates and stipulating that such entities cannot exercise ownership or control over inventory. E-commerce firms including Walmart-owned Flipkart and Amazon were also asked to provide services such as warehousing, logistics and advertising to all sellers in a fair manner as opposed to favoring their own group companies with such supporting services.

It also barred e-commerce companies from entering into pacts for the exclusive sale of products. Upfront discount on select products as well as cash back were also prohibited.

Each one of the above is nothing but a reiteration of fair trade practice expected of e-commerce firms the world over. In fact, the very definition of marketplace model—for which 100 percent FDI is allowed under the automatic route—as opposed to the inventory model which is not simply allowed in our country even under the approval route is playing the role of facilitator through information technology platform, period.

This is violated when discounts and cashback are offered only to select sellers, the ones promoted and propped up by the e--commerce platform. Ergo again the government cannot be faulted for waking up late and enforcing the marketplace model strictly.

Walmart CEO Doug McMillan and Flipkart co-founder Binny Bansal. Courtesy: Flipkart.

There is a cynical view that the Narendra Modi government capitulated to the bricks and mortars lobby that has been the traditional vote bank of the BJP which felt threatened by the loss of market share to deep-pocketed e-commerce firms that did not mind the burn rate inevitable in massive discounts to consumers with a view to making them their compulsive and regular patrons. The recent defeats for the BJP in recent assembly elections have fortified this view. Whatever the motive, nobody can cavil at the strict enforcement of law.

Even smaller e-commerce portals such as Snapdeal had welcomed the tightening of norms because they couldn’t compete with the deep-pocketed Flipkart and Amazon. Yes the consumers would be missing the huge discounts and cashback offers but they couldn’t have gone on and on in any case.

Walmart is not only tilting at the windmills but also using the stricter enforcement of norms as a punching bag to cover its own frustration at paying $16 billion to Flipkart promoters to acquire a 77 percent stake therein. But then one would have expected a savvy investor like Walmart to read the tea leaves carefully before committing its moolah.

It could not have gone on and on because the manifest abuse of marketplace model was known to everyone. Why the government gave them such a long rope all these years is of course a million dollar question. For Walmart it is a billion dollar question because the strict enforcement of the rules came almost back-to-back with its massive inorganic investment in the e-commerce space.

In hindsight, the $16 billion for a company whose balance sheet is bleeding is way above any sensible valuations especially when there was no competitor to oust it from the race with a pre-emptive price. Walmart could easily have entered into multi-brand retail in the brick and mortar segment with a fraction of this mind-boggling and ruinous investment.

The FDI policy mandates a minimum $100 million investment, half of which needs to be invested in back-end operations (read cold storage, etc) within three years of entry. The onerous condition of course was unlike 100 percent ownership in e-commerce. In brick and mortar, there is a FDI cap of 51 percent that would have necessitated scouting for a local partner. All these were doable for half the investment made mindlessly (may be in retrospect) in Flipkart.

Indeed, Walmart won the hearts and minds of consumers world especially in the USA with its ubiquitous brick and mortar stores. It could have done the same in India winning the hearts and minds of farmers as well in the process. In any case let Walmart not blame the government for its own folly---folly both in forking out an overblown premium for a controlling stake in Flipkart as well as in expecting the government to indulge in perpetuity the apparent violations of the marketplace model.

(The author is a senior columnist and tweets @smurlidharan)