US retailer looks to invest in other companies, rather than operate stores overseas Walmart has reset its international playbook as it battles Amazon for supremacy in global shopping © FT montage / Bloomberg
The day after announcing a record-breaking $16bn investment in Flipkart, Walmart’s chief executive Doug McMillon met reporters in a Delhi hotel dressed for the occasion — in a black top emblazoned with the logo of the Indian online retailer. “Nice T-shirt,” said one reporter. “Thanks,” replied Mr McMillon. “It didn’t cost much.” The visiting executive’s cost-conscious jest in the context of a multibillion-dollar purchase poked fun at the reputation of a US retailer that came to dominate its home market with a promise of “everyday low prices”. But the black Flipkart gear was also the sign of a company in transition.
In recent weeks, Walmart has reset its international playbook as it battles Amazon for supremacy in global shopping. Renowned for its hands-on approach at home, Walmart is in effect becoming an investor in retailers abroad. At the end of April, Walmart merged its UK-based grocer Asda with bigger rival J Sainsbury in a deal that will give the US retailer a 42 per cent stake in the combined company, which will have revenue in excess of $50bn a year.
This month, it acquired an 80 per cent stake in Flipkart, India’s biggest ecommerce company, for $16bn. Grand in size — it was the biggest M&A deal in the history of Walmart and India, and the largest globally in the ecommerce sector — it reflected a new approach by the Bentonville, Arkansas, retailer.
You can’t run Walmart like it’s one monolithic thing Doug McMillon, Walmart’s chief executive “It’s a departure from the historic way Walmart thought about international markets,” said one person familiar with the company’s thinking. “Historically they said: ‘We have the secret sauce and we will sprinkle the holy water in every country.’ The current management approach is very different. It’s about deciding the best way to access a market, and in India that was Flipkart.”
Trial and error has marked Walmart’s efforts to move beyond the US. Now operating in 28 countries, the company has abandoned markets such as Germany and South Korea where it failed to achieve the dominance it enjoys in the US. Walmart’s previous attempt to go it alone in India failed miserably. Walmart has “lost a lot of the arrogance they had in the 1990s,” said Bryan Roberts, analyst with TCC Global, a consultant that works with large grocers. “They’re being a lot more careful to preserve local brand equity and local practices, rather than imposing the Walmart culture everywhere.” Mr McMillon stressed the need to be “creative” and “fast” as he discussed his plans in India. As a result, he said: “You can’t run Walmart like it’s one monolithic thing.”
The pressure is on Walmart — which will this week reveal its quarterly results — because its stock has fallen 20 per cent in the past three months. Previously red-hot online sales in its home market have slowed, raising questions about whether the $3bn purchase of ecommerce start-up Jet.com in 2016 will be the game changer Walmart has sought. Share this graphic
Investors do not seem thrilled about Walmart’s latest deals, either: shares have dropped 7 per cent since the Asda deal was announced on April 30. “As investor advocates, we barely tolerated paying Jet.com $3bn,” said Bernstein analysts. “To once again pay a sales multiple of 5-7x feels like something silly, unless it is the last penalty price [for being slow on ecommerce].” Mr McMillon, Walmart’s fifth chief executive over the course of nearly six decades, has been pushing the acquisitive strategy, according to people familiar with the negotiations. He admits that it carries risks. “There are some people who may want us to focus on the bottom line and earnings in the short term,” he said. “We don’t feel that is in the best interests of the company. We don’t feel it creates the most value over time.” The 51-year-old, who has worked at Walmart for his whole career, has looked to brand himself as part of a new generation. He calls himself a “gadget guy” and has touted a futuristic vision for Walmart, speaking of virtual-reality shopping and ordering grocery delivery through voice devices at home. Share this graphic
Under his watch, Judith McKenna, who was promoted to chief executive of Walmart’s international unit in February, has been engineering Walmart’s flurry of foreign activity. Ms McKenna was the “quarterback”, driving the day-to-day discussions behind Asda and Flipkart, people familiar with the matter said. The question is whether Walmart can afford to test investor patience, and for how long. The Waltons — the world’s richest family — still own about 51 per cent of shares, giving Walmart more flexibility than many other publicly traded companies to make long-term bets, analysts say. “What we forget is Walmart is very close to being a private company,” said Mr Roberts. “That family stake means they are less beholden to Wall Street and can take something of a long-term view.”
Complicating matters for Walmart is that it is competing head-on with Amazon, which has enjoyed substantial patience from investors. Its shares have soared for years even as it burns cash on endeavours ranging from Hollywood films to drones. “I would not characterise any Walmart management team that I’ve covered for the past 15 years as being passive. They go 180 miles an hour,” said Charlie O’Shea, retail analyst at Moody’s. “The difference is the Amazon shareholder base is very patient.” Share this graphic Walmart, which will issue debt to finance the Flipkart deal, said the investment would wipe between 25 and 30 cents from earnings per share in the current financial year, and 60 cents next year. S&P downgraded its outlook on Walmart from stable to negative.
The gamble is being taken because Walmart saw India as a battleground it could not afford to lose to Amazon, people familiar with the matter said. Walmart still makes three-quarters of its sales from the US. China and India are seen as the two big growth opportunities, and China is dominated by Alibaba. In India, Amazon and Flipkart control 61 per cent of the ecommerce market, which is worth nearly $30bn today, but is set to grow 27.8 per cent a year for the next five years, according to Euromonitor. “So much of the action in this industry is about keeping opportunities out of competitors’ hands,” the person familiar with Walmart’s thinking said. Moody’s Mr O’Shea said the emphasis on international ecommerce reflected the fact that “what will work in the US won’t work everywhere. Walmart couldn’t build supercentres in India, but you can grow online sales, and revenue is revenue.” Recommended Analysis Retail
What next for UK supermarkets after ‘Sainsdas’ The Jet.com deal had been Walmart’s previous answer to the online challenge. Investors sent Walmart’s stock to a record high in January as ecommerce sales grew by between 50 and 70 per cent each quarter of last year. But then growth slowed. Walmart still only makes about 4 per cent of its $500bn annual sales from ecommerce. Mr McMillon said the boost from Jet was expected to diminish over time. Walmart’s bet on Flipkart will take much longer to pay off than Jet did, analysts warn. “The idea is that one day, hopefully, this will make them a significant sum of money,” Mr Roberts said. The Bernstein analysts said: “We see Walmart as a long-run survivor who will develop various partnerships to grow into an ever-larger monster, locked in an epic struggle for global retail dominance against Amazon and Alibaba. The outcome of battle is not particularly clear at this stage.” Mr McMillon appreciates the stakes. He told reporters in India: “We know from retail history that if retailers don’t change, they go away.”