- Walmart’s decision to acquire a majority stake in Flipkart
- Core competencies of success for Alphabet
- Threat created by the massive growth of Amazon
May 2018 was marked by a significant development in the Indian e-commerce industry. Walmart, which is undoubtedly the largest retailer in the world announced its plan to buy a 77% stake in Flipkart at a cost of USD 16 billion.
The online consumer product retail market in India is duopolistic with two major players comprising Flipkart (the domestic company which was founded in 2009 by two Indian nationals; Sachin Bansal and Binny Bansal) and Amazon (the global online consumer products retail giant which is ten years older than Flipkart).
Amazon grew massively both in the United States and Europe in the past decade and poses a serious threat to the continuity of traditional brick and mortar retailers. Walmart, the largest brick and mortar retailer in the world cannot afford to overlook the threat posed by Amazon.
The decision of Walmart to acquire a majority stake in Flipkart serves three-fold goals; entering the emerging Indian economy; the opportunity to widen its scope in online retail and to control the unchecked growth of Amazon, which may emerge as the biggest threat to the firm globally. Interestingly, Alphabet (registered name of Google) also made an announcement regarding its willingness to buy the remaining stake in Flipkart.
Alphabet ostensibly is the internet search engine provider for users of the world wide web, it caters through its website Google dot com and is indeed the market leader in its sphere, as seen in the below chart. Its search engine competitors include Bing, Baidu and Yahoo, which are in no way close to the firm.
Ironically, Alphabet is more concerned on other big brands which are not in the same business. The search engine is free for use and the most important revenue stream for Alphabet is advertisements for Google users during their searches. These advertisements are delicately chosen through machine learning so that there is a high probability that users click on these ads. For each and every click, Alphabet receives a payment from the businesses displaying these advertisements. The Alphabet smartly determines what is more likely to prompt a user to click on an ad and help maximize the revenue. In order to achieve this goal, it examines the minutest details, in form of psychography and demography of its users, the immediate plans and what interests users during a Google search. The biggest asset that Alphabet has is the pool of data on every user. It has gathered the data for each and every user through its products such as Gmail, Google Maps, YouTube and Google Play.
Therefore, it can be stated that the biggest threat to Google is from other companies that are into data aggregation such as Facebook, LinkedIn, Netflix and Amazon. Moreover, Amazon has aggregated the data of its users through online buying pattern, by the behaviour of users on the website while a selection of a product and also via its online video streaming services. The Alphabet, therefore, shares a combined goal with Walmart to keep a check on the growth of Amazon.
Furthermore, the online video streaming service of Amazon gives a tough competition to the video streaming service of Google, which is YouTube. Although the total revenue of Alphabet grew at a CAGR of 18.9% from USD 66 billion to USD 110.8 billion, the share of its advertising revenue has gone down from 90.3% to 86% (2014-17) as seen in the below chart. The Alphabet cannot afford to ignore the remotest threat to its advertisement revenue.
In addition, the high traffic on the search engine and other Google products will result in a large volume of clicks for advertisements and will also lead to a superior value for an advertiser. This would make advertisers pay more to Alphabet per click. Hence, it is in the best interest of Alphabet to ensure that internet users avail Google search to look for a service on the internet. The firm will be at an advantage if an internet user is planning a trip from London to Johannesburg and enters ‘flights from London to Johannesburg’ on the Google search bar rather than directly going to the online flight booking website such as Expedia or KAYAK. The Alphabet has initiated a service called Google Flights that compare the results across different websites similar to an online flight booking website.
Additionally, if a user wants to book a hotel room in Johannesburg, it will benefit Alphabet if the search is ‘hotels in Johannesburg’ through Google rather than a direct visit to an online hotel room booking websites such as Airbnb or Bookings.com. Similarly, if a user wants to buy a suitcase for travelling, Alphabet will be at an advantage if the search is on Google rather than an online department store’s website.
The Alphabet also has a service named Google Shopping that displays results from various retailers related to an online consumer product retail website. The Alphabet gets paid by businesses for placing their search results on the top. Google search generates two streams of revenues for Alphabet; firstly, from businesses paying to get priority for their search results and secondly, through advertisements that can be targeted towards users both during and after a search. The Alphabet has therefore evolved as an indirect retailer and its competitors in this genre are big e-commerce brand websites such as Amazon, eBay and KAYAK. However, few of these competitors have a lower brand recognition and also pay Alphabet to include their names in the search results, whereas few strong brands do not make any payments. The Alphabet has smartly chosen to discard the names of these non-paying companies from its search results. This is a strong evidence that Alphabet perceives these big non-paying companies to be a threat. For instance, Southwest Airlines choose not to partner with Alphabet for the inclusion of the option to purchase tickets through Google search as it has evolved as a well-recognized brand by the virtue of its customer services and passengers experience. The story of Amazon is exactly the identical. Google search omits search results of products sold by Amazon and in turn, displays products of its competitors. The below image testifies the fact and shows results of a Google search ‘buy washing machine in India’.
Alphabet’s decision to invest in Flipkart will also provide with a reason to restrain the largest e-commerce competitor with the strongest brand recognition.
There are other economies of scope and synergies as well associated with this investment. Amazon also provides a cloud storage service. Presently, Flipkart uses the cloud service of Microsoft. Hence, with Alphabet acquiring a stake in Flipkart, it can avail cloud services of Google. Further, both the Alphabet and Amazon consider their ventures as next-generation technology innovators. The Alphabet is investing in destructive technology such as driverless cars and robotic surgeries. Amazon has also made similar investments in destructive technologies. Currently, these firms are investing in the research and development of smart homes. Therefore, it is in the interest of Alphabet to limit the financial growth of Amazon. Thus, for the company with a cash reserve of USD 101.8 billion, USD 4 billion is a meagre investment and is a strategic step in many ways.