Opportunities And Challenges For Wal Mart In India Marketing Essay

India is seen as an emerging market for retail by global retailers. A.T. Kearney’s Global Retail Development Index (GRDI) of 2009 ranks India as the most emerging destination for retail ahead of Russia and China. However, to protect its own retail industry, the Government of India has permitted only 51 % FDI for “single brand retail”. This has deterred many multi-brand retailers to enter the retail business in India. However, these retailers can enter the wholesale business where 100 % FDI is permitted. In November, 2006, Wal-Mart entered into a 50:50 joint venture with Bharti Enterprises to enter the wholesale sector as well as back end partner. Several apprehensions are being raised about the success of Wal-Mart in India which has largely been dominated by traditional retailers. The case analyses the opportunities and challenges that Wal-Mart will face in India and concludes with discussion on the future of Wal-Mart with respect to the advantages and disadvantages that the global retailer will have in India.

Introduction

Since liberalization in 1991, the Indian market has a limited presence of global retailers such as McDonalds, Landmark, Dominos, Pizza Hut and few others. In January 2006, the Union Cabinet approved the policy on foreign direct investment (FDI) in retail to further simplify procedures for investing in India and to avoid multiple layers of approvals required in some activities. To facilitate easier inflow, FDI up to 100 % was allowed under the automatic route for cash and carry wholesale and export trading. However to protect the interests of Indian retailers, the FDI up to 51 % was permitted in single brand retail only. In 2006, Wal-Mart of US entered into a 50:50 joint venture with Indian retail major, Bharti Retail to foray into the wholesale business in India. The first Wal-Mart – Bharti store opened in Amritsar in late 2009. In the same year, A.T. Kearney’s Global Retail Development Index (GRDI), ranked India as the most emerging destination for retail ahead of Russia and China. Global retailers like French based Carrefour and US based Starbucks were exploring opportunities in the Indian retail market while; Swedish retailer IKEA shelved its plans.

A report by Northbridge Capital, UK based investment bank, revealed “Retail market size in 2009 is estimated to be of $450 billion, growing at the rate of 30 per cent per annum. It is expected to grow to $720 billion by the end of 2011” [1] .An analysis by AT Kearney revealed that organized retail in India accounted for only 6 % of the total retail market . Market analysts believe that India had traditionally been dominated by unorganized retail. They wonder whether global retailers can sustain in India considering the restrictions on FDI in retail and a strong competitive unorganized market.

About Wal-Mart of US

The retail chain Wal-Mart was established by Sam Walton in 1962 in the US. Over the years, the retail chain grew leaps and bounds to be the most successful retailer in the US. The retail chain operates in various formats such as discount stores, supercentres and warehouse clubs. Wal-Mart stores are huge stores with size varying from 42,000 sq. feet to more than 200,000 sq. feet. The business model of Wal-Mart is based on selling a wide variety of merchandize at “always low prices” often referred to as “everyday low prices”. Wal-Mart successfully expanded its operations to 14 countries which included Mexico, UK, China, Argentina, Brazil, Canada, Chile, India and Puerto Rico. By 2010, the chain operated 2,980 stores outside the US. Wal-Mart also ranks the topmost global retailer in the world with revenues of more than $ 400 billion from worldwide operations in 2009.

About Bharti Enterprises of India

Bharti Enterprises is an Indian business conglomerate established by Sunil Bharti Mittal. The group was founded in early 1990s. The group is involved in variety of businesses such as telecom, insurance, fresh foods, retail and realty. Outside India, the company has a presence in Bangladesh, Sri Lanka, Jersey, Guernsey and Seychelles. The group is in the process of establishing itself in countries like Burkina Faso, Chad, Congo Brazzaville, Democratic Republic of Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania,Uganda, and Zambia in the African sub-continent. The brand names “Airtel” and “Beetel” are household names in India. Its revenues for the year 2009 were estimated at $ 10 billion.

Bharti – Wal-Mart Tie Up

After entering into discussions with Tesco of UK and Carrefour of France which did not materialize, Bharti Enterprises of India finally struck a deal with Wal-Mart of US in November 2006. According to the deal, Bharti would handle front end retail stores while Wal-Mart would act as a wholesale and back-end partner. However, Bharti would use the name “Wal-Mart” for its stores. The joint partnership planned to make investments in the retail sector to the tune of $100 millon which could go upto $1.46 billion. Wal-Mart was already procuring goods from various Indian companies to the tune of $1.5 billion. Industry observers say that the Wal-Mart would benefit from Bharti’s experience in India while Bharti would benefit from Wal-Mart’s experience in overseas markets. However, after tremendous opposition from local people and political parties, the first store opened in Amritsar in late 2009.

Consumer Shopping Behavior in India Consumers in the west are accustomed to shopping at organized formats while in India such formats are still evolving. Various researchers analyzing consumer shopping behavior in India made the following observations with respect to selection of stores by consumers:

Traveling time : If the desired products are available in the neighborhood store, consumers would not visit the far away supermarket or hypermarket.

Range of products offered : If the consumer shopping list is such that the required goods are not available in the neighborhood store, they would visit the supermarket or hypermarket.

Services offered : The neighborhood stores offer personalized services such as credit facilities, free home delivery service, sms service and extended working hours. The organized retail formats offer good ambience, promotional offers and a good shopping experience.

Socio – Economic background : The socio-economic background of consumers determine their lifestyles and the kind of stores they would be comfortable to shop. Initially, the lower income group was hesitant to shop at organized retail formats as they felt that such stores were for the elite. However, over a period of time, the retailers adopted steps to change the perception of such consumers.

Opportunities

According to a report by McKinsey & Company, the rise in disposable income of Indian consumers would be a major factor in contributing to the growth of retail consumption. The factors contributing to the growth of organized retailing in India include growth in working population, double income households, one stop destination for all needs, changing consumer lifestyles and easy availability of credit. Data by Investment Commission of India, 2007 revealed that significant retail opportunities existed in product categories like food and beverage, consumer durables and home improvement. It further forecasted that home improvement and consumer durables would grow at a compounded annual growth rate of 20 % in 10 years time. It further mentioned that India had a significant potential to emerge as a sourcing base for a wide variety of goods for international retailers. Leading international retailers including Tesco, GAP and JC Penney are already sourcing from India.

A report prepared by Ernst and Young for India Brand Equity Foundation (IBEF) reveals that there are significant opportunities for organized retailers in various cities of India. This is because these cities have households with tremendous spending power and lower penetration of organized retail compared to metro cities such as Delhi, Mumbai and Bangalore. The online retail business progressed in India with growth of internet connections and e-payment service users. Retailers such as ebay.in, indiatimes.com and rediff.com were early entrants. Many small retailers also had their portals for online sale of merchandize.

70 % of India’s population is in the rural areas which offer tremendous opportunity for retailers. Key players in the rural retail market includ Indian Tobacco Company’s Choupal Sagaar, DCM Shriram group owned Hariyali Kisan Bazaar and Indian Oil Corporation’s Kisan Seva Kendra among others. The main product categories marketed in rural areas include seeds, urea, FMCG goods and farm produce.

Airport retailing is another emerging area for retailers. Raheja Group’s Shopper’s Stop partnered with Nuance Group, a leading Swiss global retailer to set up retail outlets at Bangalore and Hyderabad airports. Airport retailing offers opportunities in luggage, clothing and related accessories, food and beverage and souvenirs. The growing tourism industry has created significant demand for retailers dealing in artifacts.

Challenges

Logistics infrastructure in India has always been a cause of concern for global retailers. Lukas Ruecker, who oversaw emerging market business as vice president at Staples commented that the overall logistics is so much more difficult from a port in Chennai or a port in Shanghai to stores. Sumant Sinha, CEO, Aditya Birla Retail, is of the view that the logistics and supply chain infrastructure has to be built from scratch; it’s really about creating a new industry. India’s retail industry seems promising but “is tempered by the fact that the country is grappling with severe infrastructure and policy issues,” says the CII in the report it produced with A. T. Kearney. Cold chains (distribution chains for perishable items), warehousing and logistics infrastructure will create problems for global retailers if the Indian government does not focus on infrastructure. The report also points at inadequate quality control and the lack of a skilled workforce in India.

Global retailers would have to customize their formats to suit Indian conditions. The Government of India fears that entry of global retail giants could put many retailers in the unorganized sector out of business. However, discussions at various retail forums have often proved that there is enough space for organized and unorganized retail in the country. Inspite of repeated discussion on the issue at various government levels to further liberalize the retail sector, no headway had been made.

Indian retailers in organized and unorganized sector had geared themselves to face global competition. The organized retailers have focused on mall space acquisition, store expansion and diversification into various formats in addition to above and below the line promotional activities. The unorganized sector has focused on value added services. A report by PriceWaterhouseCoopers and Confederation of Indian Industry mentioned that small retailers in India had inherent advantages. They were located next to the consumer, making it convenient for top-up purchases. They knew the consumers well, some even by name. The report further mentioned that fixed costs for small retailers was very low thereby reducing their breakeven point to as low as 46 % of sales. They were also focusing on re-organizing their stores and stocking new products.

The road ahead for Wal-Mart

Industry observers wonder whether the failure of Wal-Mart in three major countries can be taken as a backdrop to predict its future in India. Consumer Behaviour experts are of the view that global retailers would have to understand shopping behavior in India and provide answers to “why should Indian’s consistently shop at foreign retail outlets?” Asitava Sen, retail industry specialist, PricewaterhouseCoopers., sharing his views in an article mentioned, “Infrastructure is a significant challenge, especially while managing fresh produce, where producers are fragmented and there is multiple level of intermediation causing waste of up to 30% to 40% in the supply chain. Real estate is scarce and expensive in comparison to the quality being offered. An inadequate supply of skilled and trained people is another significant challenge.” [2]