Morgan Stanley alerts Walmart may exit Flipkart after govt revised its FDI rules

Mumbai: Wall Street giant Morgan Stanley stated, Walmart may exit Flipkart in a move matching to what Amazon did in China if the retail giant can’t see a long-term scope for profitability. The brokerage in a report dated February 4, stated that “an exit is likely, not completely out of the question, with the Indian ecommerce market becoming more complicated”. The report comes on the backdrop of the new Foreign Direct Investment (FDI) rules for the India’s ecommerce sector which were implemented by the government on February 1.

The government’s Press Note 2 issued in December last year prohibits online marketplaces and their group companies from owning their vendors and bars 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 mentioned 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 future,” it said. Historically, Flipkart’s gross sales have been driven by smartphone and electronic sales which are high-priced.

Responding to ET’s query, a Walmart spokesperson said: “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.”

Amazon and Flipkart have been the most impacted online marketplaces and have seen a 25-35% decline in sales approximately, after having to revive their seller entities where they held an equity stake.

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.