Morgan Stanley: 'Walmart May Exit Flipkart If The Retail Giant Can’t See A Long-Term Path To Profitability'

| February 5 , 2019 , 14:14 IST

American multinational investment bank and financial services company, Morgan Stanley said after the implementation of new FDI rules that "Walmart may exit Flipkart in a similar move to what Amazon did in China if the retail giant can’t see a long-term path to profitability."

The brokerage said in a report dated February 4 that “an exit is likely, not completely out of the question, with the Indian e-commerce market becoming more complicated”.

The report comes in the wake of the new Foreign Direct Investment (FDI) rules for India’s e-commerce sector which were implemented by the government on February 1.

The government’s Press Note 2 issued in December last year bars online marketplaces and their group companies from owning their vendors and prohibits them from controlling the inventory sold on their platforms.

“There is a precedent for an exit as Amazon retreated from China in late 2017 after seeing that the model no longer worked for them,” the Morgan Stanley report titled ‘Assessing Flipkart Risk to Walmart EPS’ said.

Morgan Stanley said Flipkart may need to remove approximately 25% of its products from its site in light of the new rules.

 Smartphones and electronics would feel the greatest immediate impact because of the necessary changes to supply chains and existing exclusivity deals, the brokerage said.

“We estimate that Flipkart derives 50% of its revenue from this category, meaning Flipkart could face meaningful disruption and top-line pressure in the near term,” it said.

Historically, Flipkart’s gross sales have been driven by smartphone and electronic sales which are high-priced.

A Walmart spokesperson said in a statement, “despite the recent changes in regulations, we remain optimistic about the e-commerce opportunity in India given the size of the market, the low penetration of e-commerce in the retail channel and the pace at which it is growing."

"As Walmart scales in India, the company will continue to partner to create sustained economic growth across agriculture, food and retail. Future investments will support national initiatives and will bring sustainable benefits to the country,” the statement added.

ALSO READ: Amazon Removes Various Products From India’s Site As E-Commerce Rules Come Into Effect

Amazon and Flipkart have been the most impacted online marketplaces and have seen a drop of around 25-35% in sales after having to rejig their seller entities where they held an equity stake.

Earlier, Amazon’s two top sellers — Cloudtail and Appario Retail — removed products sold by them after the new guidelines kicked in on February 1 as they were joint ventures formed by the American online retail behemoth.