|Chennai||Rs. 27770.00 (-0.14%)|
|Mumbai||Rs. 29200.00 (2.31%)|
|Delhi||Rs. 27900.00 (-0.36%)|
|Kolkata||Rs. 28270.00 (1%)|
|Kerala||Rs. 27050.00 (-0.37%)|
|Bangalore||Rs. 27550.00 (1.66%)|
|Hyderabad||Rs. 27770.00 (-0.14%)|
With Sam Walton’s brainchild Walmart about to enter India, many questions surrounding its size and proliferation are doing the rounds. What format will the stores assume? How big will they be and will the company stick with Bharti for this venture as well?
Many of the answers to these kinds of questions will be definitively laid out as the months go by and clarity emerges on how exactly the $447-billion retail behemoth plans to set up shop here. However, much of the writing is already on the wall. For instance, if you are looking forward to a large-format hypermarket store measuring 100,000 to 250,000 sq ft, complete with garden centres, pet shops, a pharmacy, and the rest of it, the world’s largest retail chain is sure to disappoint.
According to Raj Jain, president of Walmart India, large-format stores are not an option as far as the Indian market is concerned. He cites the dearth of space and steep real estate prices in the country as reasons for rolling out smaller stores — anywhere between 10,000 and 50,000 sq ft. “Maximising the space productivity is going to be key to running a successful business. So, our formats will be invariably smaller than what is available internationally.”
There may be multiple formats too, to serve the large cities that have complexities in real estate and licence permit issues. The formats might include neighbourhood stores and compact hypermarkets (or supermarkets), among others. Neighbourhood stores are typically around 3,000 to 4,000 sq ft in size and the compact hypermarket outlets measure anything between 40,000 and 50,000 sq ft.
Walmart’s change in its store format strategy for the India market is also linked to the policy on foreign direct investment in retail that allows chains to only open stores in towns that have a population of a million- plus. Since these will be large, urban towns, availability of real estate is an issue.
Possibly the most controversial of issues surrounding Walmart’s entry is the nature of the goods it sells. Opposition parties led by the Bharatiya Janata Party (BJP), continue to raise a storm over Walmart filling its shelves with Chinese products. BJP leader Rajnath Singh said the decision on FDI in retail would harm the country because multinational companies like Walmart are buying 80 per cent of their goods from countries like China. “India will become a dumping ground for Chinese goods.”
This is a misconception that both Walmart and Bharti are trying hard to dispel. Rajan Bharti Mittal, vice-chairman and managing director of Bharti Enterprises, the company waiting to sign a retail JV pact with Walmart, retorted by saying, “Whether it’s in Brazil or Mexico, Walmart sources locally”. The business of import just does not work, pointed out an industry analyst. In India , the venture plans to source 90 to 95 per cent of the products locally. The only foreign stuff that could be sold at Walmart India would include some toys, appliances, olive oil etc. As for food items, around 98 per cent of the total is likely to be sourced from India. In India, the average invoice is likely to be low and number of transactions higher, thereby pushing up the staff strength.
The Walton family-owned retail giant from Bentonville, US, wants to offer its trademark “everyday low prices” in India. “It is all about not running promotions all the time and enticing customers to spend more money on items that are on promotion, but to let them buy whatever is on their shopping list at the best price,” Jain had said in a recent interview to Business Standard. Replying to a question, he pointed out that the no-questions-asked ‘return policy’ of Walmart would be replicated in India as well.
Whom to partner with
Whether the Walmart venture will get to brandish its name will depend to some extent on whom it partners with. The American chain has kept its cards close to the chest, though Jain calls Bharti Enterprises Walmart’s “natural partner”. After all, the two have been together in a 50-50 JV for cash-and-carry (wholesale business) for five years. Walmart also supports Bharti Retail’s Easyday stores with back-end infrastructure support. But, ask Jain if Walmart would tie the knot with Bharti, and he’s non-committal.
“All I would like to say is that we have had a great relationship with Bharti over the past five years. They are our natural partners in India. We would obviously like to explore that,” said Jain. “But, let’s see,” he adds. Jain didn’t deny there was room for talks with other potential partners either. According to him, “It all boils down to policy clarity in terms of what kind of partners and partnerships we need.”
Easyday, the new Walmart?
If Walmart and Bharti get together in the venture’s front-end, there could be at least half a dozen issues that need to be untangled. The brand name is one, and it is not the most significant by any account. Mittal pointed out that the Easyday brand name could be retained as it had established itself in the country already. There are around 200 Easyday stores in India. “Walmart is not in the habit of insisting on its brand name,” pointed out Mittal. In the UK, Walmart stores are called ‘Asda’, in Mexico ‘Walmex’, and ‘Seiyu’ in Japan. Walmart has 62 brands across the world.
A slightly trickier issue is that of equity holding by the partners. Jain clearly indicated that Walmart would like to go for whatever was allowed, adding that “we are legally permitted to have 51 per cent in the venture.” Mittal, on the other hand, is of the view that if there could be a 50-50 JV in cash-and-carry despite 100 per cent FDI being allowed in that business, a 50-50 partnership was a possibility even in front-end retail with Walmart.
The real hurdle for the Walmart-Bharti JV, however, could be the retail policy conditions that stipulate that states have a free hand in deciding where foreign chains will be allowed, with only a certain number of cities with a population of a million-plus permitted to have such stores. Since the 200-odd Easyday stores are already spread across the country, getting the math right on FDI — for only the friendly states and permitted cities — could well be a challenge. “Clearly, a pan-India approach would have been much better than a state-wise one. But you have to make a beginning,” says Jain.
Also problematic are the investment conditions — bringing in at least $100 million FDI and spending 50 per cent of that on the back-end within three years of the FDI induction. The interpretation is that the foreign investor must bring fresh funds, and therefore tying up with a running Indian chain could pose a problem. “My understanding of the policy is that the investment of a $100-million FDI will have to go into new stores and new back-end infrastructure. And that’s what we intend to do,” says Walmart’s Jain.
Assuming that Bharti and Walmart do ink a pact for retail, will there be a rejig of the cash-and-carry business? While pointing out that Walmart will continue to stay committed to the cash-and-carry business, Jain said, “Over the next 60 days, we will determine what our relationship with Bharti will be like, whether there will be any rejig of the cash-and-carry equity structure or not.”
Due to policy roadblocks, it’s possible that Walmart chooses the bigamous route — stay married to Bharti for cash-and-carry, while opting for a different partner for front-end retail. It’s not strange to switch partners. In fact, Bharti was in advanced talks with UK’s Tesco for a retail JV and finally threw a surprise by coming together with Walmart. Tesco later joined hands with the Tatas for the back-end. Even French chain Carrefour was believed to be in serious talks with Kishore Biyani’s Future group, but left it midway. For the cash-and-carry venture, Carrefour went on its own, unlike Walmart, which showed commitment through its engagement with Bharti in a business which need not have any Indian partner.
Even so, a source pointed out that there are no obvious signs of a break-up between Walmart and Bharti at this point, and there might not be one eventually. “Bharti has proven useful in the process culminating into FDI in retail. That gives them strength on the negotiating table,” the source said. At the same time, “Aces have moved from Bharti’s hand to Walmart’s, now that FDI has been allowed,” he added. So, it’s a case of trying to negotiate the best deal in a complicated policy environment.
Arvind Singhal, chairman of Technopak Advisors, however, asks, “If not Bharti, then who? I don’t think they would look at any other partner. They have been with each other for five years and have an understanding.” A top representative of an accounting firm, who did not want to be named, argues, “There’s no big case for another partner.” But, he adds, “Who knows what happens inside the boardroom?”