Wal-Mart, the world’s largest retailer, has officially planted its flag on Indian soil with the recent opening of its first wholesale store in the country. India is held up as one of the world’s most attractive emerging retail markets, although significant obstacles remain before the country to live up to its potential. Raghavendra Verma reports from New Delhi on the Wal-Mart venture and local opinion on the US heavyweight’s latest move.
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The long wait for Wal-Mart’s entry into India is finally over.
A venture formed by the US retail giant and Indian conglomerate Bharti Enterprises opened its first store at the end of May, under the banner Best Price Modern Wholesale.
The outlet, based in the Sikh holy town of Amritsar, Punjab, will be the first of a chain of 10 to 15 wholesale cash-and-carry stores that Wal-Mart and Bharti is planning to launch over the next three years.
Getting the venture off the ground has not been easy. The two sides signed their initial agreement in August 2007 but, given India’s onerous regulatory framework, as well as entrenched political opposition to any form of foreign investment in the country’s retail sector, the opening of the first store was unlikely to be straight-forward.
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By GlobalDataIt is well-known that Indian law prohibits foreign investment in multi-brand retail and there has been huge political opposition to any proposal to amend them. Ironically, the opening of Best Price Modern Wholesale was stalled by riots in Jalandhar and other areas of Punjab not linked to the formal entry of the world’s largest retailer into the Indian economy but following reports of an attack on a Punjabi Hindu priest. Nevertheless, the delay only served to demonstrate the pitfalls of launching a business in a country as culturally, religiously, ethnically and politically diverse as India.
Opponents to foreign investment regularly claim that multinational expansion would mean mass unemployment in India’s traditional, unorganised retail sector. However a clear victory of the Congress Party-led government in India’s recent general elections has revived hopes for the liberalisation of the retail sector. The new government has already acknowledged the need for the encouragement of foreign direct investment through “an appropriate policy regime”.
However, this reformist agenda of the government will still face stiff resistance in a parliament where MPs are not convinced by the benefits of commercial food retail chains. A report submitted this month by a parliamentary committee headed by a right-wing opposition leader recommended a ban on “domestic corporate heavyweights and foreign retailers for entering into retail trade in grocery, fruits and vegetables”.
The reasons attributed to this recommendation have been repeated many times in the past – loss of jobs in an unorganised sector employing around 40m people and the fear of future price-fixing by the big retailers after “causing [the] gradual extinction of local markets and regulated market yards”. The report also argued that cash-and-carry stores of foreign firms or their Indian joint ventures (like Wal-Mart’s) are merely a camouflage for entering the retail sector through the back door.
The comments in the report follow a complicated strategy adopted by Wal-Mart and Bharti to work within Indian retail law. Bharti also owns and operates front-end retail stores named ‘Easy Day’ for general consumers, with the back-end supply chain managed by the joint venture company formed with Wal-Mart.
The difficulty of operating in India is acknowledged by a former senior Wal-Mart director. “The Indian marketplace is one of the most complex in the world”, Michael Bergdahl, a former Wal-Mart director, said in a recent interview with India’s Business Line newspaper, “with so many variables in the marketplace across India, traditional retailer one-size-fits-all store strategies just won’t work.”
Bergdahl attributed the complexity to the many languages, customs, product preferences and religious beliefs in India. He stressed that the amount of time, energy, effort and creativity required to simply understanding India may prove too challenging for most international retailers. He also recognised the fact that Wal-Mart’s normal direct assault on small retailers using its retail strategy could have negative consequences due to the impact it would have on many small entrepreneurs.
As a result, it is no wonder that the company has decided to build goodwill among decision-makers in India by proposing programmes that would advise small and medium retailers on using low-cost, modern retail management techniques and processes such as assortment planning, lay-out and fixtures, displays, backroom, licences, safe food handling, customer retention and value-added services.
“We have been working closely with local suppliers to develop a sustainable and efficient supply chain”, adds Raj Jain, managing director and CEO of Bharti Wal-Mart. According to the company, over 90% of the 6,000 items offered in its stores, including fresh, frozen and chilled foods, fruits and vegetables, dry groceries and non-food items, are being sourced locally, which has helped reduce costs. These stores are meant to serve bulk purchasers such as restaurants, caterers, fruit and vegetable resellers, retail store, offices and institutions.
According to Bharti’s Jain another major challenge faced by the joint venture was to hire personnel ready with effective customer service skills. As a result, the company has set up a retail training centre for local youths in the state of Punjab where it will provide scholarships for 180 students, boosting the company’s public relations profile to boot. Its Amritsar store employs 150 people, while the company plans to hire over 5,000 people in the coming years.
Food industry specialists in India say there are a number of other challenges that Wal-Mart may face. Sanjay Sethi, vice president food and agriculture for Technopak Advisors, says countering the advantage enjoyed by the existing well-entrenched and versatile network of local intermediaries in the retail sector will not be easy.
Sethi tells just-food that local entrepreneurs have a high degree of flexibility that allows them to offer customised solutions, such as half-carton delivery, and at the same time keep their overheads low. On the other hand, he says that modern retailers will spend 7% of their revenues on rental cost and 3% on salaries and administration alone.
Furthermore, there could also be difficulties in handling local political authorities and getting around India’s often burdensome red tape, for which the experience of Bharti would be very handy, Sethi argues.
Nevertheless, India’s processed food industry is eagerly looking forward to the expansion and deep penetration of Wal-Mart and Bharti stores in the country. JLN Murty, legal and secretarial head of processed food and edible oil producer Marico, tells just-food that, despite the central government’s support for the development of cold storage facilities in the country, the results have not been encouraging. He blames the high costs involved in the venture, but hopes that with the arrival of Wal-Mart the required foreign and domestic private investments will start to flow.
Sethi is also optimistic about the local food industry and future exports. He said that once Wal-Mart managers taste Indian food products there is a good chance that the retailer will start sourcing them for its stores in the rest of the world.
The likes of Metro Group, Tesco and Marks and Spencer are already present in India’s fragmented US$400-500bn retail sector – and Carrefour is said to be planning entry. The formal opening of Wal-Mart’s first wholesale store could prove a significant staging post in the development of what is held up as one of the world’s most attractive emerging retail markets.
