Flipkart CEO refutes Morgan Stanley report; says Walmart unfazed by short-term hurdles

Kalyan Krishnamurthy, the CEO of Walmart-backed Flipkart yesterday shot down a recent Morgan Stanley report that suggested India's new FDI (foreign direct investment) norms for e-commerce might prompt the US retail behemoth to divest its stake in the homegrown e-tailer unless it found a long-term path to profitability.

According to The Business Standard, the head honcho sent an internal email to Flipkart employees on Tuesday reiterating Walmart's confidence in India. "The report couldn't be further than the truth. Walmart remains extremely confident about the potential of the Indian market and in Flipkart's ability to lead the e-commerce space," read the email. "By partnering with Flipkart, Walmart has taken a long-term view of the opportunities and hence is unfazed by any short-term hurdles."

The brokerage note dated February 4 reportedly said that "an exit is likely, not completely out of the question, with the Indian ecommerce market becoming more complicated". It had also pointed out that under the new norms that kicked in last Friday, Flipkart could face "meaningful disruption and top-line pressure in the near term" since it may need to remove approximately 25 per cent of its products from its site. Among them smartphones and electronics - which have historically driven Flipkart's gross sales and account for 50 per cent of total revenue - would feel the greatest immediate impact because of the necessary changes to supply chains and existing exclusivity deals.

Also read: New FDI policy on e-commerce: Who likes it, who hates it

That's because online marketplaces that have foreign investments are not barred from offering products of sellers in which they hold a stake and ban exclusive marketing arrangements. The new norms specify that the inventory of a vendor will be seen as controlled by a marketplace, if over 25 per cent of the vendor's purchases are from the marketplace entity, including the latter's wholesale unit.

In order to comply with these rules, Flipkart has taken down its private labels in the grocery category. Similarly, Amazon has removed its Amazon Basics line of products, Amazon Pantry has gone offline, and products sold by Cloudtail and Appario Retail - that have equity investment from the Jeff Bezos behemoth - were taken down. The legal teams of both these companies are reportedly busy reviewing the business structure to comply with the new norms.

Analysts also told the daily that while there will be a short term impact on the business, including sales, and complete compliance may take about three months, long-term impact appears to be minimal, apart from lower control on inventory and discounts. However, a draft analysis from global consultants PwC reportedly estimates that online sales will drop by $46 billion by 2022 courtesy the new restrictions.

Edited by Sushmita Choudhury Agarwal

Also read: Restrictions on foreign e-commerce companies to hit FDI in India: US industry body