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Wal-Mart in India

Published by The New York Sun on 2006-12-01

After years of trying to crack the $300 billion Indian retail market, Wal-Mart has received permission from the government of Prime Minister Singh to form an alliance with one of the country's largest telecommunications consortiums and launch stores to serve India's 1.1 billion people.

The deal between Wal-Mart and the consortium, the Bharti Group, has been cleverly structured to get around the government's continuing ban on foreign companies operating independent retail stores. Under the deal, Bharti will run the "front end" of the new stores, while Wal-Mart will provide consumer goods. The first store under the deal is scheduled to open in mid 2007.

The deal already raised the hackles of India's two Communist parties, whose support in the national parliament is needed by Prime Minister Singh's ruling 14-party coalition to stay in power. The Communists do not formally belong to the coalition, but they have the power to topple the government by withholding support from critical legislation.

The Communists and other minor Leftist parties argue that by allowing Wal-Mart into India, the prime minister is opening the floodgates through which American entrepreneurs will eventually seize control of the country $800 billion economy. India's annual economic growth rate is nearly 9%, and its economy is already the world's fifth biggest - after America, Japan, China and the European Union. According to World Bank estimates, India will be behind only America and China within a decade.

But such growth would be predicated on continued foreign direct investment (FDI), currently $12 billion annually - compared to $60 billion that neighboring China receives. India's minister of commerce and industry, Kamal Nath, told The New York Sun last night from Geneva that he expects FDI to double within the next two or three years.

Mr. Nath, India's chief salesman, has been urging foreign companies to invest in India, particularly in strengthening its infrastructure and in manufacturing facilities in the underdeveloped rural regions of a country that is half the physical size of the continental United States.

Its growing middle class - which Mr. Nath claims is nearly 250 million - is second only to that of America. This middle class represents an enormous market for retailers who heretofore have been mostly small-scale entrepreneurs or mom-and-pop-type shops. Bloomberg News says that India ranks as the world's most attractive destination in consulting firm A.T. Kearney Inc.'s Retail Development Index.

To tap into India's markets, a number of large foreign retailers have been competing with one another. They include Retail French giant Carrefour, Hongkong-based AS Watson and UK-based Tesco. Home Depot of the U.S., Ikea of Scandinavia, and others are also aiming for India.

But in addition to running up against government regulations prohibiting a foreign presence in the retail industry, these companies have met with resistance from domestic heavyweights such as Reliance, Tata and the Aditya Birla Group. The Reliance Group's chairman, Mukesh Ambani, recently announced a $5.6 billion program to create "hypermarkets" around India.

He and other industrialists have formidable political clout, not the least on account of their financial contributions to political groupings such as the Congress Party, which leads the ruling coalition. The Congress president, Sonya Gandhi, last night summoned Minister Nath to return to New Delhi to deal with the escalating controversy over the Wal-Mart-Bharti deal. Mr. Nath has been in Geneva in his capacity as the leader of developing nations in their current negotiations of the Doha Round at the World Trade Organization. Ironically, one of the objectives of the Doha Round is to open up markets in rich and emerging countries alike.

NEW DELHI: The Bharti-Wal-mart agreement is expected to energise other global retail majors to firm up their India plans, with many companies also deciding to advance their entry into the country.

Retail majors such as French giant Carrefour, Hongkong-based AS Watson and UK-based Tesco have been eyeing the retail opportunity in India for sometime now.

These companies are expected to spring into action and formulate their strategies now, with the world's biggest retailer Wal-mart finding a way to set shop in the country.

"The Wal-Mart deal is likely to be viewed as a positive move by foreign retailers, which will reinforce their interest in India. Certain large European retailers have been evaluating the Indian market for the last few years and have deferred entry plans due to regulatory constraint," NV Sivakumar, ED, PricewaterhouseCoopers said. "Entry of Wal-Mart through the available route could result in more structured deals within regulatory framework of government policy," he added.

The Bharti Wal-mart deal would also serve a sort of endorsement for many to make a decision on India. "The confidence expressed by Wal-mart in entering the Indian market may lead the others, who are sitting on the fences, to actually advance plans of entering the country", Technopak India chairman Arvind Singhal said, adding "they would make up their minds, this way or that way, but a decision would be made".

Retail biggies like Home Depot of the US, Ikea of Scandinavia and Carrefour will advance their plans of setting shop only as and when markets mature, experts further pointed out.

Ranjan Biswas, partner, Ernst & Young, says "Wal-Mart is one of the global leaders in organised retail. The fact that they have decided to enter India with Bharti as a joint venture partner shows that India is clearly an attractive destination for global retailers to consider. Additionally, the new venture also shows that India has companies which can be potential partners for big international retailers".

European, Japanese and American retailers, like Ahold, Carrefour, Tesco, Makro, Metro, Aeon and Wal-mart have made their presence felt in several Asian countries.

Nov. 30 (Bloomberg) -- After abandoning disastrous forays in South Korea and Germany, Wal-Mart Stores Inc. is coming to India.

The opportunity is no doubt sizzling, though if Wal-Mart is not careful, it might end up making a hash of it.

The world's largest retailer desperately wants to increase international sales to a third of its total from about a fifth at present. Wal-Mart has already announced plans to double its presence in China, where the number of large-format stores grew six-fold from 2000 to 2005.

India will be the next big frontier in the battle for shoppers' wallets. The country ranks as the world's most attractive destination in consulting firm A.T. Kearney Inc.'s Retail Development Index.

The $250 billion market is controlled almost exclusively by mom-and-pop shops. Only 11 percent of sales in the top 23 Indian cities are currently channeled through modern stores, according to New York-based research firm AC Nielsen. That presents a tremendous opportunity.

Wal-Mart has two decisive advantages in the Indian market.

One is its partner.

Bharti Group Chairman Sunil Mittal may know nothing about hypermarkets, but he surely knows a thing or two about running a consumer business.

New York-based buyout firm Warburg Pincus LLC took home $1.6 billion on the $290 million it invested in Mittal's mobile-phone network from 1999 to 2001.

Perfect Timing

Mittal will fully own the front end of Wal-Mart's retail business, at least for now. That's a clever move. Indian law still doesn't allow foreign investment in stores with a large range of brand-name consumer goods. The government's communist allies are opposed to its plan to open up the industry to overseas investors.

An equal joint venture between Mittal and Wal-Mart will run the supply chain and sell to wholesalers, something that German retailer Metro AG is already doing successfully in India. Mittal is not disclosing if his stores will carry the Wal-Mart brand. That will perhaps depend on the prevailing political temperature when the first store opens in the second half of next year.

After Bharti announced the deal this week, the Communist Party of India (Marxist) denounced the ``backdoor'' entry of Wal- Mart into India, saying multinational stores will cause ``massive displacement'' of unorganized retailers.

The other advantage that Wal-Mart will have in India is timing: The Bentonville, Arkansas-based company is neither too early to arrive in India, nor too late.

The Middle Class

In the early 1990s, when the beginning of India's economic liberalization brought in the first rush of global consumer-good brands to India in search of the much-touted ``300 million-strong middle class,'' disenchantment didn't take long to set in. This time it's different.

Fast-growing industries such as software, engineering and finance are helping create a true urban middle class, whose purchasing power is constantly gaining traction in the economy.

The credit-card revolution has shaken off the inherent debt aversion of the Indian consumer.

Demographics are supportive of higher spending: The typical five-member family supported by a single wage earner is giving way to smaller, double-income households.

Wal-Mart shouldn't squander its first-mover advantage in India over Carrefour SA and Tesco Plc, which are also keen to enter the country.

Here's some free advice to Chief Executive Officer H. Lee Scott on getting it right:

-- Don't compete on prices and range alone.

Wal-Mart should have learned this lesson from its Korean debacle. The Indian consumers may be among the world's most value-conscious. Yet, they may have little use for a big-box, warehouse-type store located at the edge of the city with a huge parking lot in the front.

`Everyday Low Prices'

A survey by AC Nielsen said 32 percent of Indian consumers view shopping as ``entertainment.''

That's something Wal-Mart shouldn't lose sight of in its preoccupation with ``everyday low prices.''

-- Learn localization from Carrefour.

Inadequate localization was the main reason that Wal-Mart bungled Germany and Korea: It sold both businesses earlier this year. That's where it must learn from Jean-Luc Cherreau, the managing director of Carrefour's China business, who will retire in January after an incredibly successful run.

Rather than going for culturally unacceptable frozen fish, Carrefour in China replicated the display styles of wet-market fishmongers in a cleaner environment. ``Now, on the mainland, the first image customers get when they enter a Carrefour store is fresh products,'' Cherreau recently told McKinsey & Co.'s quarterly journal. ``When customers are in the fresh area, they recognize the fresh market they're accustomed to.''

Replete With Middlemen

India, too, is a fresh-food country that equates frozen with tasteless and stale. Of course, hinterland customers will find frozen fish to be an improvement on the unfrozen variety, whose quality is often suspect. That, again, is something that Carrefour learned in China.

The food-supply chain in India is replete with middlemen. If Wal-Mart can eliminate some of them and cut the inefficiency and the waste, it will sell better food, cheaper.

That, however, will also be the cornerstone of the $5.6 billion hypermarket strategy recently unveiled by Indian businessman Mukesh Ambani's Reliance Industries Ltd.

Reliance, India's largest non-state company, has a reputation for being both ferociously competitive and extremely quick in decision-making. Wal-Mart executives should disabuse themselves of any notion that they can run Indian operations from Arkansas. Reliance has already put together a formidable management team for its retail foray.

Then there's Pantaloon Retail India Ltd., the country's biggest publicly traded retailer, which this month said it will spend $1 billion on new stores to fend off Reliance and Wal-Mart.

And that's really the last piece of advice for Wal-Mart: Don't underestimate local competition.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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