How great is the Indian retail story?

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While India is touted to offer a great opportunity for retail majors, thanks to the size of the market, it is not clear if the consumer will benefit as much. In the backdrop of Wal-Mart tying up with Bharti for the India venture, K. SUBRAMANIAN does a reality check, both of the market and the American giant.

RETAIL MAY not be a wholesale win-win game.
RETAIL MAY not be a wholesale win-win game.

K. Subramanian

After spurning several suitors and after months of negotiations held in secrecy, Wal-Mart has decided to tie the knot with Bharti Enterprises.

The timing of the wedlock is significant. It comes within weeks of the entry of two Indian Houses Tatas and Reliance into the retail business. There are reports of others jostling to capture retail space.

Currently, retail demand is estimated at $300 billion and is expected to double in the next five years. Consultancy firms such as KSA Technopak, A.T. Kearney, Pricewaterhouse Coopers and Ernst & Young provide tempting accounts of the boom and advise clients not to delay their entry.

A.T. Kearney's Retail Development Index 2006 predicts, "India's government seems to be on a gradual, but definite, path toward allowing foreign retailers into the country...And when it takes final steps, the peak time to enter will quickly pass - giving retailers that enter now a distinct advantage."

In its Great Indian Retail Story (April 2006), Ernst & Young suggests that global retailers could achieve breakthrough and realise the Indian potential "by creating the right market-entry strategy based on individual retailer's business models." Majors such as Wal-Mart, Tesco and Carrefour have been knocking at India's doors for some years now. Their intense lobbying directly or through their governments led to one of the longest and ideology-charged policy debates. Every visiting foreign dignitary lobbies for opening retail trade to Foreign Direct Investment. It is a recurring theme at bilateral meetings and strategic-partnership parleys of CEOs.

Despite such pressures, the government has not been able to revise the policy due its dependence on Left parties for survival and their opposition to FDI in retail trade. However, there is evidence of ambivalence in government's approaches. Some of the steps taken by it suggest that, while formally upholding the ban on FDI in retail, it is not wholly committed to the ban. It has been taking measures to weaken the policy framework testing the nerves of the Left partners.

The UPA government relaxed the policy in January 2006 without consulting its Left partners to permit up to 51 per cent equity in single-brand products. Touted as a major policy revision, it was announced at Davos in January 2006 to signal that further relaxation was on the anvil. Reacting to the revision,

The Economist

(April 15, 2006) wrote, "those claiming inside knowledge suggest that the provisions will be applied leniently, and that this amounts to big liberalisation by stealth." A.T. Kearney's Report, cited earlier, reflects this view. A Wharton Report adds, "Wal-Mart officials have indicated that India, where government reforms lifting restrictions on foreign ownership of retail operations are under way, could be a major target for the company." (Knowledge@Wharton, Wal-mart: Is There a Downside to Going Upscale? June 14, 2006.) There have been other relaxations.

FDI in real estate

Warehousing was opened up with 100 per cent foreign equity. Similarly, government permitted 100 per cent FDI in the real-estate sector (read, malls) under the automatic route in townships, housing, built-up infrastructure and construction-development projects, etc subject to certain minimum area and capitalisation conditions. Foreign subscription to IPOs (initial public offers) for real-estate is permissible.

Reportedly, foreign real-estate promoters are cozying up with big retail groups for promotion of malls, raising capital through private equity, etc. Thus, short of allowing direct entry, the government has created all the infrastructure to welcome FDI into retail.

Based on these developments, companies such as Wal-Mart began to expect that the ban on FDI in retail would be lifted soon and they should be at the gates to rush in. FDI was allowed in `cash and carry' trade way back in 1993. It did not attract much attention and remained in a limbo. Only two companies secured approval and only one company Metro of Germany made some progress. However, several consultants and legal practitioners have latched on to this option as a way to circumvent the ban on FDI in retail.

Indian market

After his meeting with the Prime Minister, Dr Manmohan Singh, in May 2005, Mr John Menzer, CEO of Wal-Mart, said that India was a market "to which we will just keep coming back because of its unbelievable size. There is talk (that FDI in retail) could be limited to brands or even certain regions. We think that is unproductive... we can't utilise our global leverage if that happens."

Chinese market

The Chinese market is getting saturated. Wal-Mart finds it difficult to compete with the Chinese retailers on `cheap' bargain. The market in Thailand is highly concentrated with top five retailers holding about 45 per cent share of the market, leaving no room for new entrants. Further, the Thai government has been trying to impose limits on the expansion of foreign retailers.

Wal-Mart's model of `everyday low prices' did not succeed in Germany. In July 2006 it decided to close 85 stores in Germany. Earlier, Wal-Mart had had to close operations in South Korea where also its model did not click.

In Japan, its operations through its subsidiary Seiyu incurred a net loss of $465 million in the first half of 2006. Japan has proved to be a difficult market for foreign retailers and Japanese customers look with suspicion offers of `low prices.' Cultural factors militated against the Wal-Mart model in these countries.

Back in its home country, Wal-Mart posted the worst monthly performance in November. "Wal-Mart may be facing a crisis in its business model as its low-price strategy appears to have hit a wall... ." wrote Bruce Nussbaum in

BusinessWeek online

of November 30.

The company's older strategy of huge volume sale at cheap prices seemed to have run its course in its home turf. Its efforts to sell fashion clothes failed and some other moves did not help the company to transform itself and compete with companies such as Target.

As one commentator wrote in

The New York Times

, "There's a limit to the market for which they are offering. They're smacking up against it" (December 2, 2006). Some others began to write about the "Decline and Fall of the Wal-Mart Empire."

The company has been under attack for its anti-trade union policies and failure to fulfil Medicare and social security benefits to employees. Some American States have enacted laws to prevent Wal-Mart from opening malls. Wal-Mart has to contend against adverse public wrath over its policies.

Wal-Mart is not known to have shared its technologies or methodologies with third parties in any other country.

Based on the record of its behaviour brought out in the vast literature on the company, it is difficult to expect that it would play the role of an equal or junior partner with Bharti.

(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)

(This article was published in the Business Line print edition dated December 23, 2006)
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