admin
October 10, 2013
Vishal
Krishna, Businessworld
Bangalore,
October 10, 2013
When
Bharti Enterprises and Walmart signed an agreement to run a cash-and-carry
venture, in 2007, it was hailed as one of the most important events
in Indian business history.
But, for the largest company in the world, the writing was on the wall that its Indian marriage would only work if the policies of the land allowed them to consummate 100 per cent ownership of retail operations at the earliest. Six years later, the marriage of convenience ended because of lack of clarity with India’s retail policy.
Second, the corruption charges levied on Walmart’s global operations
have made the company rethink its developing market strategy.
Walmart and Bharti opened 21 cash-and-carry stores. While Bharti
had earmarked close to $2 billion and had sunk in close to $1
billion to open and operate 212 stores retail stores which were
also sourcing 25 per cent of its requirement from the cash-and-carry
JV that it had inked with Walmart. Bharti’s Easy-Day retail chains
were in the red for the last four years and expenses were only
going up.
Recent events have been strange because Raj Jain, the ex-CEO of
the cash-and-carry business – who had been asked to leave by Walmart
– has been asked to join Bharti Retail on an advisory capacity.
Clearly it was a sign that the JV was not working out. Perhaps
both parties were inking out the final details of how much would
Bharti pay for the compulsory convertible debentures (CCD) held
by Walmart in real estate advisory firm Cedar Support Services
(CSS). Walmart had invested $100 million for the cash-and-carry
business, which was exchanged for CCDs that, in turn, would allow
them to acquire 49 per cent in Cedar to run front-end operations
owned by Bharti when the government had announced, last year,
that 51 per cent investment would be allowed in front-end retailing.
Scott Price, the CEO of Walmart Asia, had said recently that the
Indian operations were not aligned with what they expected a few
years ago. For Bharti, their 212 stores would become a burden
and with a debt of Rs 50,000 crore debt in the parent company’s
balance sheet, selling them to a new buyer would make sense. But
Bharti wants to continue the retail business. "Bharti is
committed to building a world-class retail venture and will continue
to invest in Bharti Retail across all formats," says Rajan
Bharti Mittal, Vice Chairman of Bharti Enterprises. He says that
with their current footprint of 212 stores, they have a strong
platform to significantly grow the business.
Scott Price believes that the decision to operate independently
will be beneficial to both parties. "Through Walmart’s
investment in India, including our cash and carry business, supply
chain infrastructure, direct farm program and supplier development,
we want to serve India and its people, and continue to make important
social and environmental contributions to the country," he
says. He says that Walmart is committed to businesses that serve
their members and provide good returns for shareholders, and will
continue to advocate for investment conditions that allow FDI
multi-brand retail in India.
Analysts believe that Walmart will have to start afresh to run
a cash-and-carry operation in India.
"Both companies will reevaluate their businesses and determine how much cash is needed to run a low-margin operation," says Devangshu Dutta, CEO of Third Eyesight, a Delhi-based retail consultancy.
A typical cash-and-carry business takes 5-7 years to break even
and the JV was not able to do so because of constant expansion.
There are some who believe that the heart of the problem was the
policy itself in 2007, which did not have any clauses, such as
the 30 per cent local sourcing norm and the $50 million compulsory
investment for back-end infrastructure. Industry sources say that
Walmart inked the JV because lobbyists promised a policy conducive
to Walmart’s plans to enter multi-brand retailing, which then
was not allowed.
When the government allowed 51 per cent FDI in multi-brand retailing
last year with various clauses, Walmart’s internal team decided
that its Indian operations were to be given a back seat and rethink
the investment strategy in this country. Chances are they may
just want to sell the cash-and-carry operation because they have
not tried this institutional and kirana sales format anywhere
else in the world and may want to pump in money only if these
50,000 square-foot wholesale stores could be converted to retail
chains in the future. Either way Walmart has to find a way to
revisit its India strategy and in the current circumstances it
makes perfect sense to run these cash-and-carry wholesale stores.
(This article appeared in Businessworld.)
admin
October 9, 2013
Gardiner
Harris , New York Times
Mumbai,
October 9, 2013
Wal-Mart Stores gave up on India’s huge retailing market
Wednesday, announcing that it had indefinitely delayed its once
ambitious plans to open hundreds of superstores in its own brand
across the country.
The announcement adds to the gloom concerning the Indian economy,
which has suffered a sharp slowdown and a substantial slide in
the value of the rupee in recent months. And it suggests that
the government’s efforts to lure more foreign investment
have not gone far enough, a blow to the governing United Progressive
Alliance.
Wal-Mart, an American company that is the world’s largest retailer, also announced that it was ending its joint effort with Bharti Enterprises to operate 20 wholesale “cash-and-carry” stores that sell to other businesses like retailers, hotels and restaurants.
Wal-Mart plans to buy out Bharti’s 50 percent stake in the venture, and the two companies will operate independent businesses in India. That Wal-Mart kept the wholesale business, long seen as a learning device for its larger entry into the retailing sector in India, suggests the company has not entirely ended its hopes of eventually tackling the country’s retailing market.
The announcement Wednesday came after a senior executive said over the weekend that the joint venture was “not tenable.”
Wal-Mart’s chief executive for Asia, Scott Price, said this week that the Indian government’s regulations requiring foreign retailers to buy 30 percent of products from local small and midsize businesses were the “critical stumbling block” to opening its trademark consumer stores.
“I don’t understand how this 30 percent small and medium enterprise can be executed,” Mr. Price said in an interview Monday at the Asia-Pacific Economic Cooperation forum in Bali, Indonesia, The Associated Press reported.
He said that Indian retailers were not required to follow the same rule, which made it too difficult for outsiders to make money, because no enterprise small enough to meet the government’s requirements had the capability to produce on the scale that a giant retailer requires.
“For Wal-Mart, there has been frustration brewing for a long time about the obstacles to doing business in India and the changing configurations of what it could do and what it couldn’t do,” said Devangshu Dutta, chief executive of Third Eyesight, a retail consulting firm. “To just continue to pump in money without reflecting on this would be pointless.”
Wal-Mart’s decision comes as American executives and politicians express growing impatience with India’s fitful efforts to open and modernize its economy. The government sought to address some of this frustration with a series of overhauls over the past year that ministers hoped would lead major international retailers to invest substantial sums in improving the country’s woeful retail infrastructure. So far, no company has.
With national elections scheduled for next year, there is little hope that any new policy changes will be implemented any time soon. Looser rules implemented last September led an important regional political party to withdraw from the governing coalition, briefly threatening the coalition’s viability. India’s main opposition party, the Bharatiya Janata Party, has opposed efforts to loosen foreign investment rules. Critics say that Wal-Mart would put thousands of small retailers out of business, increasing unemployment.
“I don’t see any big foreign retailers entering the market at least for the next nine months, until after the general elections, when we know what the direction will be of the policy,” said Saloni Nangia, president of Technopak, a management consulting firm based in Gurgaon. “It is a wait and watch for many international retailers who want to be in India eventually.”
Only 4 percent of India’s $500 billion retail market is controlled by large, Western-style chain stores. In China, the share is about 20 percent and in Brazil 36 percent. India’s tiny operators have few of the inventory controls of their larger brethren, and much of the country’s food spoils before reaching consumers — a heartbreaking reality in a nation where nearly half of all children are malnourished.
“Right now, India’s government is a mess,” said Ajay Shah, a professor at India’s National Institute of Public Finance and Policy.
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.
Last November, the joint venture between Wal-Mart and Bharti suspended several senior executives and delayed some store openings as part of an internal bribery investigation, one of a series of bribery investigations that have rocked Wal-Mart’s international operations. In June, the joint venture replaced its chief executive.
In 2007, Wal-Mart announced with great fanfare that it planned to open along with Bharti “hundreds” of stores, the kind of ambitious proposition that many international firms hatched early in the century as hopes blossomed that India would soon join China as an emerging economic colossus. But many of those same companies have quietly shelved their expansion plans after complex market conditions — fitful electricity, poor roads and government ineptitude — frustrated hopes of rapid profits.
Girish Kuber, a former political editor of The Economic Times, called the dissolution of the Wal-Mart and Bharti partnership “inevitable.”
“It is a sad story,” he said. “The reforms are going nowhere, and there is no investment coming in.”
Many foreign companies have found India’s endemic corruption difficult to keep out of their operations. Since U.S. law requires top executives to ensure that their international operations remain free of corruption, executives in the United States have taken an increasingly dim view of doing business in India, with its low profits and constant legal worries.
Neha Thirani Bagri contributed reporting from Mumbai, and Malavika Vyawahare from New Delhi.
admin
October 9, 2013
Nandita
Bose, Reuters
Mumbai,
October 9, 2013
.jpg)
* Wal-Mart to take over existing wholesale business in India
* Wal-Mart will need new local partner to open retail stores
* Wal-Mart can focus on supply chain for eventual retail entry
Wal-Mart Stores Inc and Bharti Enterprises are breaking up their Indian joint venture, leaving the world’s biggest retailer to go it alone in a country where it has struggled to build a bigger presence.
Bentonville, Arkansas-based Wal-Mart, the world’s largest retailer, will take over its Indian partner’s 50 percent stake in Bharti Wal-Mart Pvt Ltd, which runs 20 wholesale stores under the Best Price Modern Wholesale brand.
However, if Wal-Mart wants to set up its own retail stores in Asia’s third-largest economy, it will need to find another local partner to own 49 percent of the business under foreign investment rules that were eased last year.
Wal-Mart tied up with Bharti in 2007 and had been the most vocal proponent of prying open India’s restrictive retail market to foreign supermarket operators.
But its growth in India has been hindered by still-evolving rules on foreign investment, an internal bribery probe, and, more recently, the faltering partnership with New Delhi-based Bharti, which Reuters reported in July.
Wal-Mart has not opened a wholesale, or cash-and-carry, store in India for about a year, despite earlier plans to open eight in 2013.
Late last year, the company’s Indian joint venture suspended employees, including the chief financial officer, as part of an internal investigation into bribery allegations in India and subsequently brought in a team of lawyers from a U.S. firm to strengthen compliance.
Focusing on the wholesale business for now will enable Wal-Mart to build up its supply chain to support future retail stores, analysts said.
"Wal-Mart can now take over the wholesale business, grow it at its own pace with the investment it sees fit and it could now get aggressive in the market," said Devangshu Dutta, who heads retail consultancy Third Eyesight.
For Bharti, which is also the parent company of Bharti Airtel, India’s biggest mobile phone carrier, the break-up with Wal-Mart means it loses a deep-pocketed partner to support its retail expansion. Bharti operates the 212-store easyday chain and said it will continue to invest in and grow the business.
BIG POTENTIAL, BIG CHALLENGE
India last year allowed foreign supermarket companies to own up to 51 percent of their local operations, but no company has applied to enter Asia’s third-largest economy under the rule.
Despite the vast opportunities – roughly 90 percent of the $500 billion retail market is done at one-off mom-and-pop shops – expensive real estate, underdeveloped supply chains and fierce price competition mean margins are razor-thin and most big supermarket operators lose money.
Some officials at global retailers have said privately they are waiting for the outcome of national elections due by May before applying to operate in India in case the controversial rule allowing foreign direct investment in supermarkets is overturned by a new government.
Wal-Mart said on Wednesday it will work with the government to create conditions that enable foreign direct investment in the country’s supermarket sector.
"Given the circumstances, our decision to operate independently will be beneficial to both parties," Scott Price, president and chief executive of Wal-Mart Asia, said in a statement. "Wal-Mart is committed to businesses that serve our members and provide good returns for our shareholders and we will continue to advocate for investment conditions that allow FDI multi-brand retail in India," he said.
admin
October 9, 2013
Rashmi Pratap & Purvita Chatterjee, The Hindu Businessline
Mumbai, October 9, 2013
It
is the season of break-ups in the Indian retail space. In the
last two months, three joint venture partners have decided to
part ways in the market pegged at $520 billion.
The reasons range from regulatory issues to alleged misconduct
by one partner. But the real cause often is the distribution of
profits and control over business, which can lead to the end of
a partnership.
While there have been many instances of partners calling off
joint ventures in the past decade, the most recent ones are Bharti
Walmart, Di Bella Coffee and McDonald’s.
“Joint ventures are breaking up due to differences in the direction the business should take in terms of investments and scale,” said Devangshu Dutta, MD of retail consultancy firm Third Eyesight.
Why this happens is not difficult to fathom. Foreign firms need an Indian joint venture partner to study the market, put the back-end infrastructure in place, evolve store location strategy and get the multiple regulatory approvals.
Once all this is done and business is stabilised, future growth direction and profit division becomes a bone of contention.
DISTRIBUTION OF SPOILS
“If there is a business going on successfully, both parties want a larger share for themselves. “And who has contributed more to the business becomes a point of argument. Moreover, foreign firms want more control at some point in time,” says an analyst on condition of anonymity.
In the case of McDonald’s, the company has alleged that Indian partner Vikram Bakshi was not devoting enough attention to business, besides levelling other charges.
The case is now before the Company Law Board. “Joint ventures don’t work for a long time in India. In most cases, it is a marriage of convenience and at some point, differences of opinions are bound to arise,” said Arvind Singhal, Chairman of Technopak Advisors.
“In the case of Bharti Walmart, since 100 per cent FDI is already allowed in cash and carry, it would straightaway give Walmart control after buying out Bharti in the joint venture,” said Dutta.
Singhal said what also caused Bharti and Walmart to part ways was the regulatory fatigue the two partners were facing. “They (Bharti and Walmart) seem to have run out of patience. Doing retail business in fresh produce is increasingly becoming complex,” he said.
Despite promises, the Government has not scrapped the APMC Act, which allows only the State governments to set up markets for fresh farm produce.
Singhal said Indians usually turn a blind eye to harassment but in other countries, laws are far more stringent and the liability of the foreign partner could be much higher.
It is to protect themselves in their own country that they prefer to break-up the moment an allegation surfaces.
Whatever the reasons, foreign partners don’t usually leave India. They either go solo or find another partner to ensure that they don’t miss the action in one of the world’s largest consumer markets.
admin
October 7, 2013
Purvita
Chatterjee, The Hindu Businessline
Mumbai,
October 7, 2013
In the late 1960s, when televisions were still unheard of in India,
Nanu Gupta was busy setting up a store for consumer durables in
the heart of Mumbai. Having worked with an Usha International
distributor, he knew the nuances of the consumer durables business.
He decided to strike out on his own by selling the same sewing
machines and fans he had dealt with earlier.
Funds were limited and so was space. Gupta borrowed Rs 2,000 from family and friends to set up his first store in Mahim in 1967. To make room for customers, he had to keep a folding chair in the 40 sq ft store named Vijay Sales after his younger brother.
Gupta started off by taking goods on credit directly from manufacturers and paying them after sales. Direct purchases helped him save on dealer commissions and pass on the benefit to consumers in the form of prices lower than the competitors. The store was soon a hit and footfalls multiplied rapidly.
DOING DIFFERENTLY
The outlet now measures 40,000 sq. ft. and has become a landmark in the island-city. Vijay Sales is now run by the second generation with Nilesh Gupta (son of Nanu Gupta) as the Managing Partner.
“It was not easy to get customers as there was tough competition even in those days. We kept all the TV sets on at our stores unlike competitors, who switched them off. This was a way to attract customers to our stores,” says Nilesh Gupta.
“Today, we try to beat the competition by bringing in branded flat panel and plasma TVs even before companies start advertising the new models,’’ he adds.
Vijay Sales stocks its goods in nine warehouses that supply to all the 54 stores across Maharashtra, Gujarat and Delhi — the classic hub-and-spoke model. That helps it maintain optimum inventory levels, without over- or under-stocking any item, besides reducing warehousing costs. “Logistics is very critical to our business and we maintain individual distribution centres in every city,” says Nilesh Gupta.
What has also helped the firm do better than competition is its willingness to buy out the inventory MNC players are saddled with at a discounted price and charge consumers cheaper rates. “That helps propel sales,” he adds.
SCALING UP
Vijay Sales scaled up rapidly from 2006, sensing impending competition from biggies such as Reliance Retail, Croma. “Modern trade players actually challenged us to scale up and there were even some who wanted to buy us out. But that was the time we decided to expand our operations and entered new States,’’ said Gupta.
This expansion was not without its share of challenges. Being an unknown retailer in the northern market, there was the question of trust. “We asked consumers to call up just about anyone they knew in Mumbai to verify our credibility. That worked for us.” Outside Maharashtra, the firm is now better known as ‘Mumbai Wali Company’.
Devangshu Dutta, Managing Director of retail consultancy firm Third Eyesight, gives the company a thumbs up. “Vijay Sales has been able to transform itself, in a staged manner, from a family-run business to a modern trade format.”
The consumer durables business continues to run on thin margins, about three per cent of net sales, making it difficult for smaller players to scale up. But Vijay Sales does not want to exercise the franchise option to widen its reach. “We feel a franchise is unlikely to add any value to the business. The durable brands already have equity and the business will not be any different if it were to be run by a franchise,’’ says Nilesh Gupta.
PROFITABILITY
While the firm claims it has been making profits consistently (Gupta says they were profitable from Day 1), sustaining them could be difficult in the current economic environment. “Expenses are on the rise. Companies are reducing the margins but if the cost increases are passed on to the consumers, it will result in a massive slowdown. Also, the rising dollar has affected our import-dependent industry,’’ observes Nilesh Gupta.
Given the uncertain business scenario, Vijay Sales is not in a hurry to become a pan-India player.
But its ‘slow and steady’ approach will ensure that it doesn’t have to lament over expansion at a later date. “We are not in a hurry; we have been around for the last 46 years and would want to last many more years,’’ says Nilesh Gupta.
