Bharti and Walmart in the Indian retail market

India: A Preferred Destination?

The cradle of one of the oldest human civilization, India is a kaleidoscope of cultures, ideologies and topographies. A democracy supported by mixed economy, it provides a market comprising of close to 1.2 billion consumers, most of whom are young (below 25 years of age). The judiciary is separate from legislative branch to facilitate a free and just society. The country has witnessed robust GDP growth over the past couple of decades, following economic liberalization in ’91. The economy is expected to touch a growth rate of 9.5% in 2010. Some other key indicators are listed below.

Source: World Bank

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Emerging relatively unscathed from the Global recession of 2008-09, India exhibited its prowess in managing foreign policies and business. It seems that it is poised for its next stage of growth.

It is expected that if overall economic growth remains around 7 to 8 percent then consumption will soar. According to Mckinsey, real consumption will grow from 17 trillion Indian rupees today to 70 trillion Indian rupees by 2025, a fourfold increase. This will put India in the premier league among the world’s consumer markets. Presently, its consumer market ranks 12th.

The Great Indian Bazaar

With more than 12 million outlets, the retail industry contributes nearly 14% to the GDP of India and employs more than 18 million people. A.T. Kearney’s annual Global Retail Development Index (GRDI) ranked India as No. 2 retail destination (India held the top spot from 2005-07). The history of this sector can be traced back to village melas and haats, which subsequently evolved into convenience stores and cooperatives until the modern day retailing formats such as hypermarts, malls and supercentres. However the industry is still fragmented; organized retail constitutes a meagre 4% of retail sector in this country. On the bright side, the organized retail is set to grow at a CAGR of 50% and set to be worth $90 billion by the end of 2010. Major factors contributing to this rapid growth are changing lifestyles, strong income growth and favourable demographic profile. A lot of multinational players like Carrefour, TESCO and Wal-Mart have been sitting on fence waiting to enter India and gain a share of this increasing pie.

WalMart

WalMart – a globally recognized retail format was started by Sam Walton. It relied on the concept of discounting products to attract buyers. WalMart relied on the concept of operating in mid-sized towns which didn’t have a retail store and built its base by opening in smaller towns; which eliminated competition. It implemented a robust distribution channel while leveraging economies of scale to ensure on-time delivery for all its diverse range of SKUs. WalMart relied on the concept of EDLP (Every Day Low Price) to sell its products. WalMart proposes to enter India in the Cash & Carry Format (C&C) for which distribution and supply-chain management will be the key elements in determining its success.Its operating income in FY 2010 was $24 billion over revenue of $ 405 billion and in all 8500 retail units. 64% of sales still came from WalMart USA against 25% of international sales.

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As of today, the only retail unit opened in India is in Amritsar with plans of opening 15 more soon.

Leadership in Operations & Supply Chain Management

Leadership in operations came through following certain basic principles such as:

Every Day Low Prices

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WalMart is the preferred choice for various customers for providing the promise of constant prices every time a customer walked in the store. The prices were around 20% less than the competition. They also followed a variety of other philosophies such as:

Rollback Philosophy

All the savings made during the operational efficiency attained was passed down to the customer through continuous negotiations and whenever an opportunity arose.

Special Buy Logo

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WalMart from time to time flagged many of its items with the ‘Special Buy’ logo to attract customers. It could be any of the regularly available items with a mark-up in quantity or a mark-down in prices till stocks last.

The focus on customer was relentless. Customer service received immense importance with a philosophy to exceed customer expectations through the ‘Sundown Rule’ – answering customer queries by the End of Business hours and ‘Ten Feet Rule’ – to serve customers by greeting and asking if he/she needed anything while at WalMart.

Success Model of WalMart

Cost Control Culture

WalMart believes in controlling cost through reducing operational expenses and maintaining a lean organization. This is followed to an extent that it became WalMart’s core capability. Everyone from the top management to employee followed this rule diligently. Scott Lee, Chairman of the Executive Board and CFO Tom Schoewe too followed by travelling economy class and sharing budget hotels.

Supplier Network

One of the notable features of WalMart is its large network of suppliers. It also enjoyed a major bargaining advantage with them. It maintained operational excellence by pushing its suppliers to do the same through various methods.

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Logistics & Distribution

WalMart owns one of the largest fleet of trucks which helps it in retail operations immensely when IT was not yet a strategic factor. Later sourcing was centralized and its hub-spoke distribution model became robust providing inventory to 8500 units. Advent of EDI and RFID for its shipments were also beneficial for its logistic systems.

Small Town Locations

The factor of running WalMart in small towns was a successful idea but something that WalMart will not do considering its leadership potential.

Various Initiatives taken for SCM

WalMart has been continuously working towards getting its costs down and provide its benefit to its customers. Some of the recent developments have been:

Arrival of RFID chips to track shipments

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WalMart has become its own freight forwarder which means that it will provide logistics support using its 6500 trucks and 55000 trailers and help reduce suppliers their wholesale price wherever suppliers are not able to

This will help use excess capacity of WalMart and at the same time ensure that they get better efficiency from their suppliers

Movement towards green-SCM by being users of renewable energy 100% in 7 years, reduce energy consumption by 30% in 7 years, create zero waste

WalMart also has the state-of-the-art ERP solutions to support its logistics infrastructure

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Bharti-WalMart in India

Since Government regulations became a deterrent in FDI in India, WalMart was forced to create a JV between Bharti& WalMart USA which was floated as a separate entity. With just 26% investment allowed by foreign player, prospect of WalMart to operate independently has become a distant dream. Another rule that works against them is the prohibition of foreign investment in Multi-brand retail.

In April, a rule said that transactions between group companies should be limited to 25% of the sales was implemented. This was challenged by Bharti-WalMart Private Ltd. And the Finance Ministry conceded that such a rule was flawed but still the 25% cap on the volume of trade will continue to stay.

Bharti-WalMart is adopting creative ways of gaining favor with the government by opening its second Bharti-WalMart training institute that would train and provide jobs to people in the field of cash and carry format of stores. This also comes as a strategic move in a scenario where talent acquisition is a challenge for WalMart. A Memorandum of Agreement was signed between Bharti-WalMart and Department of Technical Education (New Delhi)

Currently WalMart is leading the lobbying of opening up multi-brand retail in India by various requests being made to the Ministry of Industry & Commerce.

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Analysis of a partnership between Bharti and Walmart

Bharti and Walmart seem to be a good fit for each other. Bharti is a seasoned Indian player with good relationships with local enterprises and governments. Walmart has expertise in providing maximum value to consumers at lowest cost. Bharti knows the rules of the game and will save Wal-Mart a lot of time and energy to overcome the system. Walmart’s logistics capability and Bharti’s execution expertise will form a potent combination; therefore on paper the venture looks great. They have taken a step in the right direction by going in with Cash n carry format first as the government allows foreign partnership only in this sector, this will sort out the operational issues of the partnership.

Though this franchise strategy with Bharti was a deviation from Wal-Mart’s usual way of entering countries, it was because the policy restrictions on foreign direct investment (FDI) in the Indian retail sector. As part of the agreement, Bharti was expected to pay a royalty between 2 percent and 3 percent of sales to Wal-Mart for using the latter’s brand name. As the retail sector is opened up for foreign players Bharti-Walmart is expected to be a formidable force in the Indian retail.

The retail industry in India is estimated at about US$ 300 billion and is expected to grow to US$ 427 billion in 2010 and US$ 637 billion in 2015. The biggest competitor for Bharti-Wal-Mart is expected to be Reliance Retail, the retail wing of Reliance, which had planned to establish 10,000 stores by end of 2010. Even Pantaloon Retail, the retail arm of the Future Group was expected to give stiff competition as it has a first-mover advantage. The strength of these companies lies in understanding the Indian consumer better, Bharti with years of experience with Indian consumer and a famed success story can help Walmart overcome the competition.

Besides competitive forces a major threat to this venture is the Indian government’s policies, the government under political pressure from huge mom and pop stores which control the majority of sales in Indian retail can not just allow big players like Walmart to enter Indian market. Entry of Walmart may put lot of middle class people out of business whose sole source of income are these small retail stores. Besides this Walmart-Bharti will find it tough to beat the economies of small stores which are most of the times just “walking distance” from the consumer and have long term relationships with consumers.

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In sum, the Bharti-Walmart venture has a lot of positives on paper but it will be interesting to see how the venture performs once Indian retail is opened up. There are lot of competitive forces and other factors which may put the relationship under immense stress.

Porter’s Five Force Analysis

Indian consumers are gradually transiting from their habit of saving. They are becoming more brand conscious and starting to look upon retail shopping as an ‘experience’ rather than an obligation. Global retailers would be happy to serve Indian markets but a major challenge is the strict Government regulation policy which restricts FDI to wholesale business. As of 2006, GoI allowed 51% FDI in multi-brand retailers and 100% FDI in wholesale (typically cash and carry format) and back-end logistics. It is in this context that we need to analyze the entry of Wal-Mart into India.

SWOT Analysis of Bharti

Strengths

Large group with diversified investments

Expertise in operating in developing countries

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Deep pockets to funds new businesses

Started by an entrepreneur, that sense still prevails in the top management

Weaknesses

Slowing growth because of competition in prime area of operations : telecom

Large size, has made the company somewhat bureaucratic

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No big and streamlined plan for future

Focus on defending its advantage in Indian telecom sector

Present in just south Asia and Africa

Opportunities

Enjoys good relations with governments/companies in India- one of the fastest growing economies in the world. It can move into other businesses easily

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A lot of new sectors coming up in Indian economy like retail, financial services etc.

Has invested in branding of Bharti over the years, consumers have instant brand recognition with Bharti brand

With opening of Indian economy it can tie up with huge MNCs to get the technical expertise

Investors ready to invest in Bharti’s new businesses because of positive experience with Bharti Airtel

Threats

Huge in Indian Telecom sector, can be tied down by competition here

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A lot of its businesses can be highly impacted by government’s licensing decisions

Indian economy is opening up with large MNCs setting up bases on their own, these pose direct competitive threats to Bharti’s businesses

The governments in India can change and Bharti may not enjoy the same relationships with new government

SWOT Analysis of Walmart

Strengths

Wal-Mart has a reputation for value for money, convenience and a wide range of products all in one store.

Wal-Mart has grown exponentially over recent years, and has experienced global expansion (for example its purchase of the United Kingdom based retailer ASDA).

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The company is adept at using information technology to support its international logistics system. For instance, Wal-Mart can see how individual products are performing in different countries and stores at a glance. IT also supports Wal-Mart’s efficient procurement.

Human resource management and development are key elements of Wal-Mart’s strategy. It invests time and money in training people, and retaining them.

Weaknesses

Wal-Mart is the World’s largest retailer; despite its IT advantages its size poses an inherent weakness.

Walmart lacks flexibility since it is spread across many product categories.

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Despite being global it is present in only few countries across the world.

Opportunities

To form strategic alliances with other global retailers in China and eastern Europe

Walmart is present in limited number of countries, the opportunity exists for it to expand in growing markets like India and China

New types of stores offer Wal-Mart opportunities to exploit market development. They diversified from large super centres, to local and mall-based sites.

Opportunities exist for Wal-Mart to continue with its current strategy of large, super centres.

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Threats

Being a leader means that Wal-Mart has to fend off competition, locally and globally.

Walmart may be exposed to political environments in countries that it is present.

The cost of producing many consumer products has reduced because of lower manufacturing costs. Manufacturing costs are also low due to outsourcing to low-cost regions of the World. This has lead to price competition, resulting in price deflation and such intense price competition is a threat.

The story thus far

The entry strategy of Wal-Mart in India has been drastically different from that followed by the company when it expanded first in the markets outside US. The launches in China and Germany were marked by huge media frenzy just before the opening day leading to a deluge of customers thronging the stores. Also, Wal-Mart opted for metros and major cities to kick-off their operations since the urban customer was expected to be more aware of the brand Wal-Mart and thus the target market selected. Wal-Mart tweaked its strategy by making a low-key entry in Amritsar, Punjab in May 2009. There was also a deliberate attempt to avoid attention to the brand Wal-Mart by naming the initiative ‘Best Price Modern Wholesale’.

Bestprice-modern-wholesale.jpg

The emphasis in the logo is on Best Price with both Bharti and Walmart logo in small font acting as the supporters rather than the drivers of the project.

The reasons for such a strategy are as follows:

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Local Opposition: Over the past 5 years various pilot retail ventures in India have met with stiff resistance from local communities especially farmers and retail store owners. By making its entry a low-key affair, Wal-Mart does not want to attract undue attention. Also, since it is the ‘Cash and Carry’ business, there is no to blow the trumpet when the target audience is itself the retailer and not the end customer. The requirement was a focused and not high profile entry and Wal-Mart executed it accordingly

Competition: ‘Metro’ and other Cash and Carry giants started off their operations in India by opening stores in Bangalore, Delhi, Mumbai and other metros. The hinterland thus offered opportunities in terms of untapped market. Wal-Mart recognizes and acknowledges the fact that more than 10 million other tiny retailers in India are its greatest challenge and greatest opportunity. If it can win them over, they are likely to become its biggest customers. Anger them and they could use their political power to block expansion.

Cash Rich State: At first glance, opting hinterland over metros seems consistent with Wal-Mart’s US strategy where the company expanded by targeting small towns because of low cost of entry. There is, in fact, more to the same. Punjab in years since the Green Revolution has had among the highest per capita income levels in the country. Thus, it makes sense for Wal-Mart to enter a cash-rich state.

Brand Recognition: Even though Wal-Mart has made a low key entry de-emphasizing the brand Wal-Mart, the customer needs to have enough trust in the organization he is making the transaction with. The name Wal-Mart is in some ways familiar in Punjab due to the large diaspora from the region in US/Canada and thus breeds recognition.

In order to make enhance their image in the region, Wal-Mart has also embarked upon a host of social initiatives.

1. Donation of push carts to village vendors.

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2. Part time employment to cart vendors and senior citizens

3. Plantation drive: Planting saplings around the store

4. Mera Kirana and Business Solutions Centers to help small and medium retailers implement best retailing practices

The Wal-Mart strategy so far has been low-decibel while steadily gaining acceptance of the local community. This is essential for when the FDI in retail is finally approved by the government, the company shall hope to make a smooth transition from Cash and Carry to their traditional stores and announce the same, hopefully, with a bang.

Will WalMart succeed in India?

India boasts of a buzzing retail market with growing incomes. However WalMart must realize that it will face woes in forward logistics considering that India loses 40% of its produce due to storage and transportation issues. Even if WalMart builds up its fleet in India, the logistics network in India is far from the best. India’s highway network can carry around 65% of freight traffic and 85% of passenger traffic and many National Highway Development projects not yet complete the challenge will be immense to be cost-effective.

Many of the SCM initiatives followed by WalMart will take more time to get implemented in India including the RFID initiative, green SCM initiative. However freight forwarding is something that WalMart can look at to increase their effectiveness in India. Analysts say that typically cost-measures taken in investments in cold-storage and other logistics measures take around 3-5 years to yield benefits. Currently with the single-store in Amritsar, the backyard of wheat-bowl of India such a problem is averted. Analysts also have pointed out that a supply-chain of international standard will take at least a decade before it comes to India.

WalMart is also facing issues in terms of keep itself away from its share of controversies. With an intention of staying low-profile in India to avoid any retaliation from local retailers it opted for an alternate name ‘Best Price Modern Wholesalers’ logo, which was claimed to have 4 trademarks already by the Department of Trademarks.

With the existing Government regulations the growth story of WalMart in India looks slow to moderate in medium term. With a new target of opening just 7 stores and hiring around 1100 employees against the existing 450 employees says about the sentiment of Bharti-WalMart in India.

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Commentary on Walmart

WalMart is presumably doing many things right by playing its cards intelligently and in sync to the Indian sentiments of not being too pushy about its prospects in India. Also taking up initiatives to gain local sentiment is something that will work in its favor. Government on the other hand is also looking towards easing out rules in Cash and Carry Format which could benefit WalMart and speed up plans for same.

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