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Walmart was right to invest in e-commerce giant Flipkart – no matter what investors say

Walmart Inc.’s agreement to take a controlling stake in Flipkart, a leading online shopping site in India, is two things: An appropriately ambitious bet on e-commerce and a serious test of investor patience.

The retailer said Wednesday that it had agreed to pay US$16-billion for a 77-per-cent stake in Flipkart. It is Walmart’s biggest deal ever, easily surpassing the US$10.8-billion it paid for Asda nearly two decades ago.

The big-box giant is right to pay up for the chance to make a big splash in India. The country’s e-commerce market is expected to experience explosive growth in the coming decades, so any retailer should see it as a covetable prize.

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For Walmart, hitching its wagon to Flipkart probably represented its best shot at winning in India. The regulatory environment there has made it difficult for Walmart and other international retailers to make inroads, according to Satish Meena, an analyst at Forrester Research.

And Flipkart has an established track record of success. In its latest fiscal year, it recorded US$7.5-billion in gross merchandise volume, which represented growth of more than 50 per cent over the previous year. So far, it is withstanding Amazon.com Inc.’s challenge, retaining its position as the market-share leader.

By joining forces with Walmart, perhaps Flipkart can build on that lead.

And by making this investment in Flipkart, Walmart played some indirect defence against Amazon, which was reportedly kicking the tires on a Flipkart acquisition, too.

Now the question for Walmart is whether shareholders are willing to hang in there to see what kind of results the retailer can get from this long-term bet.

The company’s stock was down more than 4 per cent in early trading on Wednesday. The steepness of the decline was a bit surprising, if only because news reports had been indicating for weeks that a deal of this scale was likely around the corner.

Perhaps investors are turned off by the specifics of the hit to profitability. Walmart said Wednesday that it expected the deal to cut into earnings per share by 25 to 30 US cents in the current fiscal year and about 60 US cents in the year after that. It also plans to use newly issued debt to help finance the deal, which prompted S&P Global Ratings to switch its AA outlook on Walmart to negative from stable.

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Unfortunately for Walmart, I can’t help but think investors would have received this Flipkart deal more favourably if it had landed, say, six months ago.

Back then, Walmart’s 2016 decision to plunk down US$3.3-billion to acquire Jet.com was looking like an unabashed home run. The retailer’s e-commerce growth had been turbocharged since it added Jet founder Marc Lore’s brain power to its ranks. Investors sent Walmart shares soaring to a record as it appeared the deal had given Walmart powerful ammunition in its battle with Amazon.

But when Walmart’s digital sales growth slowed in the fourth quarter, investors started questioning whether that deal was, in the long run, going to prove as fruitful as it had looked in its first year. I suspect all of that is colouring investors’ view of just how much potential the Flipkart deal has to be a game-changer.

But I have long argued that Walmart is not going to win its battle with Amazon by taking baby steps or simply imitating Amazon’s playbook. It needs to act early and it needs to be aggressive – and buying Flipkart is just such a move.

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