Walmart is breaking into India's massive and growing consumer market with its biggest acquisition yet, spending $16 billion for a controlling stake in the online retailer Flipkart, whose delivery drivers, with their motorcycles and oversized backpacks, have become ubiquitous across the nation of 1.3 billion people.
Retail sales are being fueled by a hot economy in India. The International Monetary Fund has projected that India's economy will grow 7.4 percent this year.
The acquisition surpasses Walmart's $10.8 billion deal to buy United Kingdom's Asda back in 1999 and makes its acquisition two years ago of online retailer Jet.com for $3 billion look paltry. It also reflects Walmart's focus on growth opportunities as it tries to narrow the gap between itself and Amazon.com.
Walmart is building fewer big stores and expanding its presence online.
Flipkart's supply chain arm, eKart, is established more than 800 cities and makes 500,000 deliveries daily.
Online sales in India have exploded in recent years, reaching $19.6 billion in 2017, according to a Forrester report. Those sales are expected to grow rapidly this year. Both Walmart and Amazon have pushed hard to catch up to Flipkart and to become the first major U.S. retailer to establish a substantial foothold in the country.
Walmart will own approximately 77 percent of Flipkart. The rest will held by some of its existing shareholders, including co-founder Binny Bansal, a former Amazon employee. Other stakeholders include Tencent Holdings, Tiger Global Management and Microsoft Corp.
"India is one of the most attractive retail markets in the world, given its size and growth rate, and our investment is an opportunity to partner with the company that is leading transformation of eCommerce in the market," said Walmart CEO Doug McMillon in a company release.
Walmart will absorb some short-term pain in India. It said Wednesday that it expects earnings for the current fiscal year to be depressed by 25 to 30 cents.
"As Flipkart is expected to generate meaningful losses for at least the next few years, this is clearly an investment for the future," said Charlie O'Shea, Moody's lead retail analyst.
Walmart's business in India had previously been focused on small businesses. The company, based in Bentonville, Arkansas, opened its first wholesale outlets in India in 2009, but Indian law prevents it from selling products directly to people. Walmart's wholesale stores, Best Price, which are owned and operated by its India division, are only open to members. Those members consist solely of licensed businesses.
Based in the city of Bangalore, Flipkart was founded in 2007 by two former Amazon employees, Sachin Bansal and Binny Bansal. The two men are not related.
Walmart, which operates stores under 55 banners in 27 countries outside the U.S., has faced strong headwinds it its outward expansion.
In China, where more than 700 million people are online, it has struggled to compete with homegrown rivals like Alibaba Group Holding Ltd and local retail chains like Sun Art Retail Group Ltd. Walmart opened its first store in China in 1996 and has just over 400 stores now. It signed a strategic alliance with Alibaba's rival, JD.com.
Rumors have swirled for weeks about U.S. retailers, namely Walmart and Amazon, circling Flipkart. That has not gone down well with tens of millions of small traders in India, who for years have used political muscle to slow the arrival of international retailers.
The deal is "a clear attempt to control and dominate the retail trade of India by Walmart," the Confederation of All India Traders said just after the agreement was announced, saying it would encourage predatory pricing, hurt Indian businesses and create an uneven playing field. The group says it represents some 60 million businesses.
Shares of Walmart Inc. dropped more than 3 percent at the opening bell Wednesday.