It’s no secret that e-commerce is a hot space today – recent retail sales data out of the US shows the space experiencing double-digit growth, year over year, a bright spot in an otherwise lackluster data release. In a fast-paced, winner-take-all arena like this, M&A activity is bound to pick up, and not just in the US. Recently, it’s come to light that Walmart is in talks to take a stake in leading Indian e-commerce platform Flipkart, reportedly valuing it as high as $20 billion. This is clearly the retail giant’s next move to counter Amazon’s dominance in e-retail, something that Walmart has been investing in heavily as of late. The news comes one month after Walmart announced a joint-venture with Tokyo-based Rakuta and a year after it scooped up e-retailer Jet. Of course, it has hardly been a one-sided fight, with Amazon hitting back at Walmart last year via its acquisition of Whole Foods. With India poised to be the next big arena for e-commerce growth, heightened competition should ensure plenty of M&A action over the near term.
While growth is high in e-commerce relative to other subsectors of the US retail industry, particularly the brick-and-mortar stores that Walmart is best known for, the potential for strikingly higher growth can be found abroad. While China seems like an obvious step, it has been notoriously difficult for both Amazon and Walmart to break into, as local incumbent player Alibaba maintains its position of dominance, fiercely defending market share while making full use of its home field advantage. India, however, has no such incumbent and represents an attractive market with its highly connected population, new political reforms, and a burgeoning middle class. Ripe for growth, but relatively fragmented, the potential for e-commerce growth has attracted the attention of the global giants in the space. Already, Amazon has committed to investing $5 billion in the country, while Alibaba has backed PayTM, an Indian payments processing company. Not wanting to be left behind, Walmart has been searching for a way to increase its footprint in the country, and Flipkart represents an opportunity to do just that.
What about Mid-Market Firms?
Obviously, with a potential deal valuation of $20 billion, Walmart means business, but this clearly stretches the definition of “mid-market” well beyond its limits. However, there are inevitable knock-on effects in any market when global giants are involved, and this is no exception. As the bigger players throw their weight around, smaller ones will be forced to become more competitive, as Amazon, Walmart, and Alibaba all have shown no hesitation in the past when it comes to steamrolling less sizable competition in their quest for growth. One way to survive their impending onslaught is to merge similar companies – with enough combined size, the newly formed entity can extract cost-savings and implement best-practices firm-wide, allowing them to compete with the behemoths. Ultimately, pooled resources can allow them to compete or even become appealing takeover targets themselves!
The other knock-on effect is somewhat less direct. Delivery logistics, connectivity, payments processing, warehousing, and electricity supply are all strained when e-commerce grows, and India’s infrastructure, while improving, is still generally lacking. Local companies who can successfully navigate and/or mitigate the issues stemming from this strain on behalf of the larger companies stand to earn considerable profits as the demands on these areas of infrastructure are increased. However, in order to provide a level of service that is meaningful to a company the size of Walmart or Amazon, smaller domestic companies will need to consolidate, which should drive activity in the mid-market space. It’s also not unlikely that one of the bigger players may simply buy-out a smaller company in these fields to keep the expertise out of the hands of their competitors while allowing them to leverage it. In such a competitive market, defensive purchases are hardly out of the realm of possibility.
Riding the Waves
It’s clear that e-commerce continues to be a mighty and disruptive force in the retail world while offering a multitude of opportunities. Though the major players in the market dominate the landscape, the nature of the internet allows for thriving competition, while e-commerce expansion drives the growth of industries providing support and logistics, both by nature and by necessity. Shrewd firms and investors in the mid-market M&A space can take advantage of this sea change by consolidating to remain competitive or by merging to provide top-notch services to the titans in this industry.