Leading multinational investment bank and financial services company, Morgan Stanley, clearly announced that Walmart could leave Flipkart in a similar move to the Amazon that was made in China in the year 2017 if the retailer could not see the long-term track for profit. Addressing the issues, in a report of 4 February, brokerage has said that “An exit is probable, not entirely out of the question, whereby the Indian e-commerce market is becoming increasingly complicated”.
With the government of India declared changes to foreign direct investment policy for E-commerce industry, it is likely that companies like Amazon and Flipkart will have to modify their business model to get hold of more customers. As per the new rules from 1 Feb 2019, foreign-owned e-commerce services will not be able to sell products of the companies in which they have a stake and will also be excluded from direct deals with vendors to only sell on one platform, a move they have said will cause ‘significant customer disruption.’
In order to continue operating, Amazon and Walmart will now have to turn their sites in India into platforms for independent merchants.
Both, Amazon and Flipkart are the most influenced online marketplaces and have seen a decrease of around 25-35% in sales after reassigning their sales entities where they had an equity attention. The two best-selling Amazon products, namely Cloudtail and Appario Retail, eliminated the products sold by them after the new guidelines were implemented on February 1.
In August 2018, Walmart has decided to buy Flipkart with 77% share. Walmart spokesperson has said in an interview: “Despite the recent regulatory changes, we remain positive about the chances of e-commerce in India given the size of the market, the low penetration of e-commerce into the retail channel and the rate at which it is used. He further added, “As Walmart grows in India, the company will continue to work mutually to create sustainable economic growth in agriculture, food and retail.”
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Effect of New Rules
According to Morgan Stanley, under the new rules, Flipkart will have to close its 25 of its products from the site definitely. It is well known that Smartphones and electronics category are the most popular areas for the customers in India. This would feel the greatest immediate impact because of the necessary changes to supply chains and existing exclusivity deals. Brokerage has said that, “We estimate that Flipkart derives 50% of its revenue from this category, meaning Flipkart could face meaningful interference and top-line pressure in the near term,” it said. In the past, Flipkart’s gross sales have been driven by smartphone and electronic sales, which are high-priced.