A New, Global Powerhouse Begins To Take Shape
By Anil K. Gupta
SMITH BRAIN TRUST – Walmart’s announced and anticipated strategic moves in the United Kingdom, India and Brazil will likely go down in corporate history as a bold and brilliant example of a global strategy reset. In early May 2018, Walmart announced that it had agreed to merge Asda, its U.K. subsidiary with 2017 revenue of over 22 billion British pounds ($30 billion), with rival J Sainsbury PLC in return for a 42 percent share of the merged company. The combined retailer would immediately become the largest in the U.K.
Then, last week, Walmart announced it had agreed to pay $16 billion to acquire 77 percent of Flipkart, India’s No. 1 online retailer. Founded by two ex-Amazon employees, Flipkart has managed to stay ahead of an extremely aggressive Amazon. Jeff Bezos, Amazon’s founder and CEO, has committed to invest at least $5 billion in the company’s Indian operations. Analysts estimate that Flipkart holds a 40 percent share of India’s online market, compared to 31 percent for Amazon.
Over and beyond these moves, Walmart is rumored to be looking for a buyer for its Brazilian operations. The company entered Brazil in 1995. After 23 years, Walmart Brazil is ranked only No. 3 in the country’s supermarket industry and it continues to lose money year after year.
Any one of these moves would be a newsworthy event. Put together in a short span of time, they represent a major reset of the company’s global strategy.
I view these moves as not just bold, but also brilliant. To me, they exemplify three of the most fundamental tenets of global strategy.
First, never throw good money after bad. If one of your businesses holds an unattractive position in the market and there is little chance that you can transform it, the faster you exit, the better. As Warren Buffett put it more colorfully, if you find yourself in a chronically leaking boat, it’s better to focus on changing boats than on patching the leaks. This is the situation with Walmart Brazil today. The business suffers from scale disadvantages vis-à-vis its bigger rivals. The Brazilian economy is mired in chronically slow growth. And, Walmart Brazil has been losing money for almost 10 years. At this point, exiting from Brazil is far and away the best strategy.
Second, a smaller share of a much bigger pie is almost always better than a 100 percent share of a smaller one. Walmart is following this tenet in the U.K. A combined Sainsbury-Asda will enjoy at least two major benefits. First, with one player out of the picture, competition is likely to be a bit less brutal. Second, as the largest retailer in the U.K., the combined entity will benefit from scale advantages over Tesco, currently the No. 1 retailer in that country. In essence, Sainsbury-Asda will be turning the tables on Tesco. It’s clear that, for Walmart, owning 42 percent of Sainsbury-Asda is far superior to owning 100 percent of Asda, currently No. 3 in the country.
Third, commit with gusto to high growth opportunities, especially if you find a winning formula. This is the case with Walmart’s move to take control of Flipkart in India. India currently is and, according to International Monetary Fund, is likely to remain the world’s fastest-growing economy for years to come. It is already the world’s sixth-largest economy. By 2022, it is projected to become the fourth largest and, by 2025, could even overtake Japan to become the third largest, after the U.S. and China.
Equally importantly, India’s online market is also the fastest-growing in the world. Currently estimated at $27 billion, it is projected to reach almost $100 billion within just five years. With Walmart’s deep pockets and strengths in sourcing and logistics, it’s a reasonable bet that Flipkart should be able to maintain its 40 percent share of India’s ecommerce. That’s $40 billion in gross merchandise sales by 2023.
Even for Walmart, that’ll be a very meaningful number. There’s no other market in the world where Walmart could achieve this kind of scale and growth. Importantly also, it expands Walmart’s fierce competition with Amazon in the online space to the global stage.
When corporate historians look back on Walmart’s trajectory, May 2018 is likely to be viewed as the month when a new and very different Walmart began to take shape.
Anil K. Gupta is the Michael D. Dingman Chair in Strategy and Entrepreneurship at the University of Maryland’s Robert H. Smith School of Business. He is listed in the 2017 Thinkers50 ranking of the “world’s most influential living management thinkers.”
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