Walmart spent $16 billion to go big in India. She has to make it work
The first big challenge for Walmart International s new CEO Judith McKenna is navigating a notoriously risky, potentially lucrative market.
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The last two executives to run Walmart had overseen the company's international business. Now it's Judith McKenna's turn to show what she can do with the global role. Her first test is a big one.
McKenna took over in February 2018, and three months later Walmart International signed its biggest deal ever — spending $16 billion to buy 77% of India's top online retailer, Flipkart. She was appointed as Walmart International CEO after spending three years as the chief operating officer for the company's main US business.
In a statement, McKenna described the Flipkart alliance as a "good cultural fit" that aligned with Walmart's aim "to contribute to India's success story, as we grow our business."
Satish Meena, a senior analyst at Forrester Research, was blunt about what's riding on the Flipkart deal: "This is Walmart's biggest bet on e-commerce. ... If they fail to execute with Flipkart here it is certainly going to be a big setback. The easy part of this deal is done. The difficult part starts now."
Taking over Flipkart gave Walmart a massive jump on a market projected to be worth $200 billion by 2026 in a country that the American giant has been trying to crack for years. India's rules about foreign investment have prevented Walmart from opening its classic stores in the country, restricting it instead to 23 wholesale distribution outlets.
"We are delighted to learn from, contribute to and work with Flipkart to grow in India, one of the fastest-growing and most attractive retail markets in world," McKenna said in a statement in August, when the deal was officially completed. Walmart was unable to accommodate a request for an interview with McKenna for this story.
The arrangement with Flipkart is anything but risk-free. What was initially billed as a massive coup has begun to show a few cracks.
Walmart, which said it would pump another $2 billion into Flipkart as part of the deal to "accelerate growth," announced in October that the acquisition would knock about $740 million off its profit in the last quarter of 2018. In February, the company conceded it had taken a hit from the deal, but said it would pay off in the end.
The warning signs may have been there.
Flipkart is not publicly traded and does not disclose its finances, but regulatory filings in India reported by local media said combined losses at its two main units spiked 71% in the fiscal year ended March 2018, before Walmart took over. The Bangalore-based company's model of sacrificing profitability for the sake of rapid growth will not fly with Walmart, according to Meena of Forrester Research.
"Walmart is not going to look for growth at any cost," Meena tells CNN Business. "They are looking for growth, but at the same time they have profitability in their mind, because now they have to go straight to the investors every quarter in terms of what is happening in India."
That could be a tough transition to make, and Meena anticipates Flipkart's losses will continue to mount for at least a year — maybe two.
The financial troubles were compounded by the shock exit of Flipkart's co-founder and CEO Binny Bansal. He resigned suddenly last November after an investigation into allegations of "serious personal misconduct."
Walmart has not revealed details of the allegations against Bansal, saying that while its investigation did not find evidence to back them up, it did "reveal other lapses in judgment" on his part. Bansal remains a Flipkart shareholder and continues to sit on the company's board.
When he left, Bansal said he had been planning to stay on for a few more quarters to manage the transition, but that his decision to step down had been "accelerated" by recent events.
Meena said that Bansal's exit was less of a setback to Walmart, because it was looking for both founders to step away eventually. (Co-founder Sachin Bansal, not related to Binny, sold his stake and stepped down as executive chairman when the deal happened.)
"The only thing is the way Binny exited was not in good taste, but Walmart was always prepared to work without the founders," he said.
Still, the churn within Flipkart's top ranks could allow Walmart's arch rival Amazon, with its more established and stable India business, to gain ground at its expense.
Another jolt came in late December, when the Indian government imposed new restrictions on both companies. The rules, which took effect on February 1, ban non-Indian online retailers from offering their customers exclusive products such as smartphones or selling their own products through affiliated companies.
Flipkart and Amazon have captured a large share of the Indian market by offering steep discounts and exclusive deals, but the new rules threaten to slam the brakes on that growth.
As Walmart tries to move on from those setbacks, it has at the helm someone with decades of experience.
McKenna has been with Walmart for more than twenty years, having first joined its UK subsidiary Asda in 1996. She served as Asda's chief operating officer and chief financial officer before taking on the lead strategy role for Walmart's overall international business.
Walmart decided to sell Asda to local rival Sainsbury's in a $10 billion deal announced just days before the Flipkart acquisition. The Asda sale is still awaiting regulatory approval.
McKenna moved to Walmart US in 2014, starting as chief development officer for its business unit before being promoted to executive vice president and chief operating officer of Walmart US just months later.
"Judith is obviously a veteran at Walmart and she's really supportive of what we're trying to do," Binny Bansal said in an interview with CNN Business in October, one month before he stepped down.
Bansal said McKenna and the rest of Walmart's leadership had taken a relatively hands-off approach with Flipkart up to that point, saying both companies were in "the learning phase" about each other.
"I think they [have] bought into the vision that we have and what we are trying to do here," he added.
Despite the teething problems with Flipkart, Meena said Walmart has been smart about the bets it's made, under McKenna's leadership, like dialing back its UK operation and partnering with local player Rakuten in Japan.
"As of now, none of the bets have converted into results," he said. "It is very early to speak but ... it gives Walmart a fighting chance in the coming years."