Analysis: Walmart and Ikea think big in India
The past couple of days have seen landmark Indian moments for two retail heavyweights.
The Competition Commission of India (CCI) approved US retailer Walmart’s $16 billion acquisition of e-commerce venture, Flipkart. Whilst Swedish home furniture giant, Ikea, opened its first Indian store, in the southern city of Hyderabad.
Both companies are eyeing huge opportunities, but they also face significant challenges in a market with many quirks. When the Flipkart deal was first announced, a flurry of Walmart investors expressed various concerns, including the company’s significant losses.
Walmart went on the defensive, with its President Douglas McMillon, stating: “We basically want to be in places that have a tremendous opportunity, which is what led us to Flipkart in India. And when you look at the size of the market, $1.3 billion, you look at the GDP growth in the market, look at retail growth in the market, look at e-commerce growth in the market, and then you start to understand that Flipkart has a strong management team. They built out an ecosystem. It’s not just a pure e-commerce business, but there are complementary platforms within that business.”
Ikea, meanwhile, has reportedly spent INR10 billion on the approximately 400,000 square feet Hyderabad store. But analysts believe that it will be several years before the retailer starts seeing a significant return on that investment.
Many Indians are loyal to small, family run shops. They are also "very price sensitive, but they're also value sensitive. You can't give them substandard quality at cheaper rates. They want both," says Paresh Parekh, Partner at Ersnt & Young. "Indians lose trust very fast, so I think they will have to get it right the first time, in terms of price, quality and experience."
It is entering a highly fragmented sector, where the top five players account for just 2% market share. Meanwhile, leading Indian online players - Pepperfry and Urban Ladder - are expanding into the offline space and offering differentiated formats under omnichannel business models, which comprises both online marketplace and 'touch and feel' outlets, to compete with the arrival of Ikea.
Ultimately, both Walmart and Ikea are betting big on the rise of India's middle class. Will they emerge triumphant or crash and burn? Let us know your thoughts in the comment section below.