Understanding the growth stories of Walmart and Amazon has the potential to yield insights about the future of Big Bazaar and Flipkart. The reason is that, historically, the US market has consistently shown similar trends in the Indian market a good 5-10 years ahead (right from adoption of general purpose technology to even widespread adoption of e-commerce) and the gap is increasingly decreasing.

Although extrapolation is complex, given that the Indian offline market is not as mature as Walmart was when Amazon started and Amazon did not grow at the rate Flipkart is growing, still, comparisons are inevitable. The good part is that it appears likely, given the low penetration of both organised offline and online retail in India, that there is ample space for both to grow.

Looking at Walmart and Amazon sales (See Graph) they seem to be correlated. They show the same seasonal pattern, with sales peaking in the last calendar quarter (CQ) of each year which corresponds to the holiday season. Further analysis reveals that once the seasonal nature of sales is removed, the correlation disappears and both companies have an independent growth path. There is no evidence of co-movement between the two sales series and it seems that neither has an effect on the other.

This is also supported by the fact that Amazon sales have been growing at a higher rate (6.3 per cent QoQ) than Walmart (1.6 per cent QoQ), and this trend seems much more pronounced beyond 2008 (see graph). After 2012, it can be observed that Walmart’s growth is stagnant due to the macro-economic issues of the US economy, whereas Amazon is growing unabated. Still, it will take Amazon almost another decade to catch up to the level of Walmart’s sales.

Not against each other? Further analysis reveals that Walmart is more stable in its revenues as compared to Amazon, which seems more volatile to shocks. This points towards the fact that primary categories of product sold by Walmart are less elastic as compared to Amazon. As per the 2006 quarterly report of Walmart, almost 30 per cent sales was contributed by groceries and only about 1 per cent by electronic items, and the product mix seems rather stable even today. This seems rather different from the product mix sold by Amazon, which primarily comprises electronic appliances and books. One interpretation of this could be that rather than affecting players such as Walmart, Amazon may have actually affected other specialised brick-and-mortar players involved in selling electronics, books, jewellery and watches. This creates the possibility of both large offline and online retailers surviving in the future with few or no smaller players. In fact, there is a possibility that Amazon and Walmart might have never competed against each other but were competing against the smaller players in retail.

Further, Walmart and Amazon serve a different clientele altogether. Amazon is a destination for the young, upwardly mobile net-savvy customer, whereas Walmart has been known to be associated with middle and lower-income American households. However, the profitability of Walmart has been steady and higher than Amazon. Looking into the future, the growth of e-commerce seems to be slowing down and would reach a point similar to its offline cousins. This would have a major impact on the growth-dependent funding of e-commerce companies such as Amazon which, for its part, has been working on building verticals beyond e-commerce to stabilise its earnings and profits.

There’s space for both Similar to this, in the Indian context too, online and offline retail are addressing different segments of the market, both in terms of type of goods sold as well as economic stature. Big offline retail chains such as Big Bazaar and Reliance Fresh have a focus on middle income group families looking to purchase grocery and other day-to-day consumables. Other items such as apparel and appliances are a part of the offering, but have a smaller share. On the contrary, online retail goliaths such as Flipkart and Snapdeal focus on the middle and higher income groups, offering electronics, branded apparel, luxury items, and so on. Online retail in groceries is developing, but is yet to emerge as a threat to offline retailers anywhere in India, including metros.

Based on our observations from the US market over the years, In India too there would be space for both online and offline retailers albeit in different categories with each catering to different customers. Unlike the US where WalMart grew over 25 years to its present size, large Indian retail players are only a decade old. They still do not have store presence across smaller towns and from this perspective are behind online retailers in serving such under-served markets. Clearly, the online players have the advantage of lower set-up costs and would stand to gain more as compared to offline retailers as real estate addition is costly and time-consuming. Besides, the larger format of physical retail has been found to be financially unviable in smaller towns in India.. In the long run this could stabilise to online retailers serving more in smaller towns and specialised high-end requirements among metros, whereas mega retailers primarily serve most lower-end requirements in the metros. In fact, synergies between the online retailers and offline ones in serving the two markets in India could lead to a more efficient hybrid model unique to India.

Prageet Aeron and Anshul Jain are Professors with the Management Development Institute, Gurgaon

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