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Wal-Mart Plans in India Still Put On Hold
Posted by: abirk (IP Logged)
Date: May 21, 2014 11:10AM
Eyeing India as a long-term growth market, U.S.-based retail giant Wal-Mart (WMT) says it is currently focusing on expanding its wholesale retail business in the country and would wait for further clarity on rules for entering the multi-brand retail business.
Wal-Mart’s growth in India has been slowed by an internal bribery probe, uncertainty over regulations on foreign investment in the country, and in October, the severing of its partnership with New Delhi-based Bharti Enterprises.
India allows full foreign ownership in wholesale stores and under a 2012 law change allows up to 51 percent foreign ownership in supermarkets. Wal-Mart, which had been the most vocal foreign advocate for opening up India’s large but fragmented retail industry, has not yet applied to open retail stores in the country.
Concentrating in China
Wal-Mart is expanding in China while still in a frustrating holding pattern in India. The company said that it plans to build 30 new retail stores and warehouses later this year as part of a growth plan announced in Beijing last October. Wal-Mart is looking to develop a larger presence in the country’s chief urban centers while building Supercenters in third- and fourth-tier cities. Meanwhile, in that other highly populated, but much lower income nation to China’s south — India — Wal-Mart is still waiting for the government to allow for foreign direct investment in retail.
Wal-Mart’s China CEO Sean Clarke said that the retail giant will also invest 580 million yuan (about $94 million) to upgrade about 55 older stores. And in October, Wal-Mart’s global CEO Mike Duke said that they will “accelerate development in China” by opening around 110 new facilities nationwide.
“China is a key strategic market for Walmart,” Duke said.
Scenario in India
Wal-Mart also faces tough competition from the existing Indian retail players. Indian companies, whice have understood the nature of the Indian shopper, are already competing with the small shops by going the hypermarket route, selling goods at wholesale prices. Another big challenge which Wal-Mart faces in India is consumers' perception. In the U.S., when you think of a big store, you think of lower prices. In India, the perception is exactly the opposite. The common perception is that smaller shops can offer lower prices because their expenses are lower.
India would be just as attractive for the multi-brand retailer, with its 1.2 billion people, a young demographic, and — like China — an urbanization trend firmly in place.
Wal-Mart has no retail presence at all in India, but it does operate a wholesale cash-and-carry business in partnership with Bharti Enterprises. The store is not what global Wal-Mart shoppers are accustomed to, however. Unlike Wal-Mart China, which Americans would recognize, India’s Wal-Mart is nothing more than one big and cumbersome warehouse.
Setting Up New Company in India
The retailer and Bharti Enterprises had last year decided to independently own and operate separate business formats in the country. Wal-Mart is looking for a partner in India.
Wal-Mart announced plans to open some 50 wholesale stores in India in the next five years — adding to the 20 already there. “We are taking a number of important steps to strengthen compliance so that we do the right thing every day,” Scott Price, Wal-Mart’s Asia chief executive, said in a statement. “We are evaluating and reinforcing procedures and programs relating to all compliance areas, including licensing and permits, food safety, and responsible sourcing among others.”
Wal-Mart has been lobbying with American lawmakers since 2008 for facilitating its entry into the Indian market, according to lobbying disclosure reports filed by the company in the U.S. In India, the retail sector is dominated by small retailers consisting of local Kirana (i.e. grocery) shops, general stores, hand-cart hawkers and pavement vendors. Wal-Mart's entry into India faced severe opposition from these small shopkeepers, who currently account for the majority of retail sales together forming 92% of India's total retail market.
Wal-Mart’s problems in India extend well beyond the government’s procurement rules. The Indian authorities are investigating whether Wal-Mart violated foreign investment rules by giving Bharti Retail an interest-free loan of $100 million that could later be converted into a controlling stake in the company. Both companies deny wrongdoing.
One of the biggest threats for Wal-Mart will be changing the way India shops. In the U.S., it is common for people to shop for groceries once every few days. Partly, this is because of the fact that grocery stores in the U.S. are not located close to residential areas as they are in India. Consequently, Wal-Mart customers buy in bulk, visiting the store infrequently. However, Indian consumers visit a grocery store almost every day, sometimes more than once a day. In a typical Indian neighborhood, daily needs stores are located within a few meters from the residential blocks. The new elected government under Narendra Modi may pose some opportunities in the times to come.
Stocks Discussed: WMT,