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Happy hours in quick service restaurants and cafes now

Nupur Anand, DNA – Daily News & Analysis

Mumbai, October 26, 2013

Happy hours, a concept limited to liquor, is finding its way into quick-service restaurant and cafe chains.

Dominos, the pizza chain, is giving buy-one-get-one free offer, while fine-dine restaurants such as Blue Frog in Mumbai are offering 50% discount during lunch time.

Costa Coffee has also been running a happy hour programme post 7 pm.

Devangshu Dutta of Third Eyesight said though this concept originates from bars, other retailers are also increasingly using it to drive footfalls.

“No doubt there is a slowdown and consumer sentiment has been dampened. Retailers generally use the happy hour concept during a low footfall period.”

In fact, Dominos has been witnessing the slowest growth ever since it got listed in 2010.

Since there are very few players in the quick-service restaurant space which are listed, experts believe that Dominos growth story can explain the entire industry’s scenario.

Santosh Unni, CEO Costa Coffee, said they have come up with the happy hour promotional offer to increase the coffee drinking hour. "Typically after seven consumers don’t have coffee. With this, we are aiming at extending the hours by giving them a value for money offer." He said with the promotional scheme, business transaction during that time has trebled.

The domestic quick service restaurant business, estimated to be Rs 3,400 crore in 2012-13, has been struggling with slowing growth in the past one year.

To provide more value offerings to the consumers, restaurants have been coming up with low price point products or increased discounts and promotions.

Experts said such promotions are going to continue and even intensify.

(Sourced from DNA.)

Failed malls in India point to soured retail boom

Agence France Presse
Mumbai, October 23, 2013

The Centre One shopping mall on the outskirts of Mumbai is gloomy and bereft of customers, even during India’s annual festive and wedding season when retailers traditionally cash in.
"Business is dull, usually weak," said one bored-looking fashion salesman.
The shopping centre’s empty look is no exception. In the past decade, supermarkets and malls have spread across India’s large cities and towns, fuelled by fast economic growth and excitement about middle-class buying power.
A "Malls in India" report released by Images Research last month found 470 shopping centres were operational this year, up from just 50 malls in 2005, and expected to soar to 720 by 2016.
"But over 90 percent of India’s malls are struggling," said Susil Dungarwal, founder of Beyond Squarefeet, a mall management and advisory firm based in Mumbai. "Just 15 of these can be counted as running successfully."
India’s middle-classes with their rising disposable incomes have long been considered a dream for mall-builders. The country’s retail sector is set to grow at an annual rate of 16 to 19 percent, reaching 56.8 trillion rupees ($901 billion) in 2016, the Images Research report shows.
The government has also relaxed foreign investment rules in a bid to attract international supermarkets and boost the economy through retail.

But Dungarwal and other analysts say the majority of India’s shopping centres are struggling with a potent mix of high real-estate prices, bad planning and sluggish demand as the economy slows.

When it opened in 2003, the 150,000-square-foot (14,000-square-metre), three-storeyed Centre One was billed as the first world-class mall in Navi Mumbai, a satellite town that is filled with apartment and office towers. But competition from larger, better-designed malls such as Inorbit and Raghuleela, which sprung up nearby later, drew the crowds away.

In the last year alone, Mumbai suburbs have seen the Milan Mall and the City Mall shut down, while others such as Evershine and Mega Mall are struggling to stay afloat, analysts say.

India’s slowing economy, with growth at a decade-low of 5.0 percent in the year to March 2013, has put a firm dampener on spending. But other factors are compounding the troubles at the tills. Over the past decade, builders and developers have rushed to build without paying sufficient attention to what a mall requires to survive.

Until recently, most ignored the so-called "catchment" area, analysing the geographical area from which a mall attracts most of its visitors, experts say. In the northern Indian city of Gurgaon in Haryana state is the hyped "Mall-Mile" — a vast stretch of nearly a dozen shopping malls, built almost one after another. "Not all of them are working out," said Devangshu Dutta, chief executive with retail consultancy Third Eyesight, adding that they were all chasing too few shoppers.

The oversupply of malls means many have empty space: about a fifth of Centre One lies bare and so does up to 75 percent of the Dreams Mall in Bhandup, an eastern suburb.

Mumbai’s Atria, once a packed mall, now has "For Rent" signs coming up and looks deserted, with low footfalls owing to "bad designing, causing people to miss stores," Dungarwal said. Another nearby mall, Sobo Central, is unable to draw the crowds as it does not offer a food court nor a multiplex.

"People do not go to a shopping mall to shop. They go there for the experience, to hang around," said Dungarwal.

India’s real estate is amongst the steepest in the world, and Kishore Bhatija, owner of Inorbit Mall, said costs have risen by 300 percent in Mumbai, which is 50 times more than markets such as Delhi, Bangalore, Chennai or Kolkata. Retailers are therefore facing the double whammy of spiralling real estate prices and sluggish sales.

They also face growing competition from online retailers such as Flipkart, India’s answer to Amazon, which hand-delivers goods to the front door for minimal cost. Shoppers can buy with the click of the mouse, with no need to battle traffic jams or India’s punishing weather.

"Malls will have to do everything to drive footfalls. They will have to make sure there is enough excitement to attract people," said Dutta from Third Eyesight.

(Sourced from The Times of India.)

Tata opens ‘Star Daily’ outlet in Pune, makes use of UK firm Tesco’s retail expertise and back-end support

Sagar Malviya, The Economic Times

Mumbai, October 17, 2013

Barely a week after the world’s top retailer Walmart ended its association with Bharti Group, its British rival Tesco has moved a step closer to entering the $450-billion Indian retail market with the Tatas launching a neighbourhood convenience store format modelled on Tesco Express.

Tesco Plc, the world’s third largest retailer, has a partnership with Tata Group’s Trent under which it provides back-end support and retail expertise to the Indian conglomerate’s Star Bazaar hypermarkets.

Tesco Hindustan Wholesaling, the Indian unit of the British retailer, supplies merchandise including some of its own labels, to 15-odd Star Bazaar outlets, sized anywhere between 40,000 sq ft and 80,000 sq ft and selling food and grocery to apparel to consumer durables.

The new format, Star Daily, is completely different. The first Star Daily outlet, opened in Pune last week, is just about 1,800 sq ft in size and stocks mainly fresh foods, groceries and essential items, a person aware of the store launch said. "Similar to a kirana store, Star Daily is kept open almost 15 hours starting at seven in the morning," the person added.

Both Trent Hypermarket and Tesco did not respond to an email query.

Globally, corner shops — such as 7-Eleven in Japan, Taiwan, Thailand and Singapore, Lawson in Japan and Oxxo in Mexico — are among the largest retailers in their respective markets, reflecting the growing business of small outlets in several countries despite the presence of international supermarket and hypermarket chains. Even Tesco runs more than 1,500 convenience stores averaging 2,200 sq ft in small shopping precincts in residential areas and countryside in the UK.

In India, ubiquitous kirana wallahs generate more than 90 per cent sales of consumer products industry.

Analysts say high sales volume will be the key to Trent’s success in the convenience store space. "The newer format can help them (Tatas) penetrate better catchment areas, but volume needs to be maintained to compensate for the higher overhead costs including real estate," Devangshu Dutta, chief executive at retail consultancy Third Eyesight, said.

So far, Trent Hypermarket has been relatively conservative in its retail expansion despite rivals adding hundreds of stores each year. In fact, it did not open a single Star Bazaar store last financial year, but managed a 21 per cent increase in total revenue to Rs 801 crore.

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Big retailers find profit swallowed by size and sales

Raghavendra Kamath, Business Standard
Mumbai, October 16, 2013

Spencer’s Retail, part of the Sanjiv Goenka group, was looking to break even in financial year 2010-11. As the deadline passed, the retailer postponed the target by another 18 months to the second quarter of 2012, only to revise it again.

Now, Spencer’s hopes to turn profitable at the earnings before interest, depreciation, taxes and amortisation (Ebitda) level by December 2013.

Spencer’s is not the only company which has fallen behind its break-even target. Saddled with high overhead costs and low margins in a slowing economy, food and grocery retailers such as Sunil Mittal’s Bharti Retail, Kumar Mangalam Birla’s Aditya Birla Retail, and Tata group-owned Star Bazaar are struggling to turn in a profit.

Most of these retailers started operations between 2006 and 2007 or went on an aggressive expansion spree during that time. The only exception was Mukesh Ambani’s Reliance Retail which decided to go slower on opening stores. And that seems to have paid off. Reliance Retail, which started in 2006, posted a profit before depreciation, interest and tax of Rs 78 crore in 2012-13. In comparison, both Spencer’s and Aditya Birla Retail logged losses.

While these retailers saw their sales grow, they made themselves more vulnerable to economic downturns by expanding aggressively. At the start in 2007, retailers such as Bharti and Aditya Birla paid hefty rents to book whatever space was available to build scale and kick in efficiencies but when the slowdown struck in 2008-09, their stores could not sustain such rents. Many retailers leased large properties just because they were available, hoping they would return dividends. The rush to acquire retail space was such that the Bharti group used to pay Rs 6 to Rs 8 per square feet more than the other contenders and sign 30-year leases against the industry practice of 18-24 years.

Turning cautious

"Today, we have become realistic about store size. We will not book 6,000 square feet just because they are available at Rs 25 or Rs 30 a square feet," the then chief executive of Aditya Birla Retail, Thomas Varghese, had told Business Standard in an interview in 2010. Aditya Birla group insiders say the company also paid exorbitant fees to retail consultants to conduct market studies and chalk out strategies.

But as modest sales and expensive rentals made these stores unviable, retailers began to aggressively close stores or curb expansion. Aditya Birla has closed down over 150 supermarkets in the last four years, while Spencer’s wound up operations altogether in cities such as Pune to focus on profitability. Even Reliance Retail closed around 50 stores and downsized its employee strength.

The retailers have also been weighed down by the lack of a unified tax regime. Kumar Gopalan, chief executive of Retailers Association of India, which represents the voice of retailers, says local taxes are posing a big challenge for the companies. In the absence of goods and services tax (GST), retailers have to pay taxes in every state where the goods are moved. For instance, in Mumbai, retailers need to pay octroi, a local levy for goods transported into the city. That raises the cost as in the absence of GST, retailers prefer to set up multiple distribution centres instead of one unified centre. "Most retailers open their distribution centres with taxation as a factor and not according to ease of transportation," says Gopalan.

As things stand, there is no common formula to success in Indian retail. Arvind Singhal, chairman of management consultancy Technopak Consultants, says: "The biggest problem is that there is no single format which works for the entire country."

Mohit Kampani, chief executive of Spencer’s which is focused on hypermarkets, says: "Developing our compact hypermarket model took time; we got it going in earnest only in 2011-12."

Aditya Birla retail, which was initially focused on supermarkets, too has taken to the hypermarket model recently. Bharti experimented with different formats as well. Kampani says it took some time for companies to understand that grocery retail business works best in partnership with developers where retailers pay a share of their revenue instead of fixed rental amounts.

Singhal says there is a fundamental mismatch between costs and earnings as rents in India are almost double of what retailers pay abroad. He says ideally, hypermarket chains should pay 2.5 to 3 per cent of revenue as rent to make them viable; supermarket chains should pay 5 to 6 per cent of revenues and clothing retailers 8 to 9 per cent.

While most retail chains overshot these limits, they also faltered at another level. Sanjay Badhe, an independent consultant and former chief marketing officer at Aditya Birla Retail, says big retail chains did not understand what customers wanted and underestimated the clout of kirana stores.

"FMCG companies serve 14 million kiranas and they will not move to a new channel unless modern trade demonstrates efficiencies and through put," says Badhe. "Why would they allow retailers to take away pricing power?"

Badhe believes the break-evens have also been delayed because of frequent management changes that resulted in unnecessary strategic U-turns and discontinuity. Spencer’s saw two new heads within six years, Aditya Birla Retail saw similar changes at the top. First, CEO Sumant Sinha quit and the group replaced second CEO Thomas Varghese with Pranab Barua who came from Aditya Birla Nuvo last year.

"If you frequently change the leadership, there will be no continuity in business strategy and direction," he says.

Funding woes

Delays in foreign direct investment have proved costly too. Many believe that availability of low-cost foreign funds would have helped the retailers improve their operating profits by lowering the cost of finance. "Some of them built the business to attract foreign direct investment within a few years. That did not happen and this is dragging them down," says Devangshu Dutta, CEO of retail consultancy Third Eyesight.

While the government has allowed 51 per cent foreign direct investment in multi-brand retail, policy restrictions such as 30 per cent mandatory local sourcing have dampened the hopes of foreign retailers who are taking a slow, cautious approach to entering India.

"Most Indian retailers are not able to raise funds from foreign institutional investors and private equity funds. Domestic markets do not have that kind of depth, so funds come at a higher cost," says Technopak’s Singhal.

Retailers, however, are trying out new formats to turn the tide. Spencer’s is focusing on compact hypermarkets (25,000 to 30,000 square feet) in five chosen geographic clusters and growing its non-food component to improve profit margins. It is also building a centralised distribution system and evaluating franchisee model to reduce logistics costs. The retailer is also increasing the share of unique commodities in the food and beverage segment from about 5 per cent to 30 per cent.

Aditya Birla too is developing new strategies. It is conducting store-specific surveys and planning to offer customised products depending on the taste of the people in the locality. For instance, at its Mahadevpura store in Bangalore, which attracts a cosmopolitan crowd, it offers more non-vegetarian and bakery products, while at the Bull Temple store in the city where shoppers are mostly traditional Kannadigas, it stocks more puja flowers, rice and local fruits and vegetables.

Eventually, it is sales that will matter. As Singhal of Technopak puts it, "If the economy grows a bit faster and optimism returns, retailers will reach profitability in 15 months."

(Sourced from Business Standard.)

Go Your Own Way

Much has been written about the various relationship break-downs that have happened in the Indian retail sector in recent years. The biggest, most recent high profile ones are between Bharti and Wal-Mart and the three-way conflict playing out at McDonald’s. Other visible ones include Aigner, Armani, Jimmy Choo, and Etam, while Woolworth’s faded away more quietly because, rather than being present as a retail brand, it was mainly involved in back-end operations with the Tata Group.

I think it’s important to frame the larger context for these relationship upsets. Most international companies, non-Indian observers as well as many Indian professionals are quick to blame the investment regulations as being too restrictive, and being the main reason for non-viability of participation of international brands in the Indian consumer sector.

However, India with its retail FDI regulations is not the only environment where companies form partnerships, nor is it the only one where partnerships break up. Regulations are only one part of the story, although they may play a very large role in specific instances. In most cases, FDI regulations are like the mother-in-law in a fraying marriage: a quick, convenient scapegoat on which to pin blame.

Many of the reasons for breaking up of partnerships can be found in the reasons for which they were set up the first place. The main thing to keep in mind is that the break-down is inevitably due to the changes that have happened between the conception of the partnership to the time of the split. The changes can fall into the following categories, and in most cases the reasons behind the break are a combination of these:

  • External factors, including regulations, economic conditions or politics which could fundamentally change the operating environment, close off existing opportunities or open new ones, and raise questions about the logic of the partnership.
  • Internal factors, including differences between the partners in terms of overall business strategy, scale expectations, operating methodologies, desire for management control, margin and return expectations, or investment capability.
  • Changed perceptions, primarily around the strengths and support that each party expected the other to bring into the relationship, or performance they were supposed to deliver, and finding out that the reality differs from the initial perception on one or both sides.

According to Third Eyesight’s estimates, more than 300 international brands are currently operating in the Indian retail sector across product categories, if we just count those that have branded stores, shop-in-shop or a distinct brand presence in some form, not the ones that merely have availability through agents or distributors.

Of these, about 20 per cent operate alone, while other others work with Indian partners, either in a joint-venture or through a licensing or franchise arrangement. The relationships that have broken up in the last decade are only about 5 per cent of the total brands that have come in, and in many cases the international brand has stayed in the market by finding a new partner.

So there’s life after death, after all. And my advice to those who’re feeling particularly defensive or pessimistic because of a few corporate break-ups: take time for a song break. Fleetwood Mac (“Don’t Stop”, “Go your own way”) or Bob Dylan (“Don’t Think Twice, It’s All Right”) are good choices!

Walmart Delays Plans to Enter Indian Retail Market

Anjana Pasricha, Voice of America

New Delhi, October 11, 2013

After waiting for years to open superstores in India, the world’s biggest retailer, Walmart, has split with its Indian partner, delaying its ambitious plans to expand in the country. India opened the door for foreign retailers last year, but tough regulations are proving to be a deterrent, and virtually no foreign chains have come forward to invest in the country’s $400 billion retail sector so far.

After parting ways with its Indian partner, Bharti Enterprises, this week, Walmart said it will continue to run the 20 wholesale stores that the two companies operated jointly.

Although it has not "packed its bags",the announcement indicated that the global retailer’s plans to open large supermarkets to sell directly to consumers in India have been put on hold.

That is because foreign companies cannot open retail stores without an Indian partner, although they can own wholesale businesses.

Walmart was the most enthusiastic about the massive potential in India, where the retail business is dominated by "mom and pop" (small, privately owned) stores. It was expected to be the first to crack the market after the government opened the sector to overseas investors last year.

But a year on, there are virtually no takers in the supermarket sector.

Retail analysts say Walmart and other foreign investors have been discouraged by stringent entry conditions imposed on overseas retailers. The government imposed these to make the liberalization measure, which has sparked fierce opposition, more politically palatable.

Devangshu Dutta, head of retail consultancy Third Eyesight, cites one example of the kind of measures that are putting off investors: a rule that requires them to source 30 percent of their products from small and midsized Indian businesses.

“If you look at Walmart’s overall sourcing mix, a very large chunk of manufacturing happens in China and other Asian markets. India is growing, but it is quite a small fraction of their sourcing, which means they would need to take the time and effort to develop the Indian supply base to their standard," said Dutta. "That takes time and it’s a dampener if you are looking at a quick start.”

Walmart’s Asia Chief Executive Scott Price has also cited the sourcing rule as a “critical stumbling block.”

By opening up the retail sector, the government was hoping to attract billions of dollars in foreign investments to shore up India’s faltering economy.

But the head of the Retailers Association of India, Kumar Rajagopalan, said “too many clauses” are hampering such investment.

“That is putting in too many spokes in the wheel. Many of the retailers from overseas come in and see that there are 48 licenses to take in India. They don’t know how to handle so many licenses, how to take care of so many compliances,” stated Rajagopalan.

Analysts also said foreign retailers will probably wait until after India’s elections, scheduled to be held by next May, before making a decision on investing in the country. That is because the entry of overseas chains continues to be a politically charged subject, and there are worries about how any change in government may impact India’s retail policy.

(Sourced from Voice of America.)

Bharti, Wal-Mart both stand to benefit

Raghavendra Verma, just-food.com
New Delhi, October 11, 2013

Wal-Mart’s decision to terminate its Indian joint venture with the Bharti Enterprises was not unexpected.

"The joint venture was like trying to run a three legged race with one leg of each partner tied together," Arvind Singhal, chairman at Technopak Advisors, tells just-food.

The two companies operated stores in India under the Best Price Modern Wholesale and Easyday banners. Wal-Mart will now take full ownership of the wholesale business, the US retail giant announced on Wednesday (9 October). For its part, Bharti will operate the consumer facing Easyday retail stores across all formats.

According to Singhal, many of the difficulties faced by the partnership were rooted in India’s foreign direct investment regulations, which were updated last year. "Not much progress has been made – if any – by Wal-Mart…because investments are needed in both the areas but Walmart cannot invest into the front end," he tells just-food.

India’s restrictions on FDI had been hindering growth for both Wal-Mart and Bharti, Singhal argues.

New Indian FDI regulations require foreign investment to be channelled into creating fresh capacity rather than purchasing or investing in existing front-end and back-end operations.

Devangshu Dutta, chief executive of retail consulting firm Third Eyesight, says this contributed to mounting tensions regarding strategy and operations. In particular, Dutta highlights that FDI regulations meant that "Bharti would not have achieved any sort of cashing out of its investment in favour of Wal-Mart in the future."

The split paves the way for Wal-Mart to step up growth in India, pundits suggest.

"Wal-Mart can now go ahead without having to worry too much about the compliance with Indian foreign direct investment rules like local sourcing and any restrictions on back-end and front-end investments as none of those conditions apply on the cash-and-carry business," Singhal notes.

The wholesale business stands to benefit from "the fragmented retail market and the myriad of small businesses in India" that "potentially provide a large customer base for the cash-and-carry business," Dutta adds.

However, he also warns that growth might be hard to deliver. "The business has been coasting for over a year without new openings that [had previously been] planned."

Dividing the business should prove beneficial for Bharti, because it will no longer face any restrictions on operating its supermarkets in opposition party ruled states, whose governments had been fighting foreign investments in organised retail. Singhal suggests Bharti might tap private equity financing to fund an expansion of its retail chain, arguing the breakup might help the Indian food retail sector grow.

Dutta says the supermarket chain stands to benefit from increasing branded food consumption and "issues related to the operating environment being tackled, such as the simplification of transaction taxes across states through the introduction of a common goods and services tax, and continued investment in transport infrastructure".

That said, the break-up could dampen investment sentiment in India.

India Ratings & Research director of corporate ratings firm, Deep N Mukherjee, observes that foreign investors are already wary because of recent cases involving breaches of the US’s Foreign Corrupt Practises Act that have involved Indian businesses.

India’s retail sector might contract in the two quarters to March 2014. "Higher consumer inflation and marginal nominal wage growth are expected to act as major deterrents for consumer spending," Mukherjee comments. "Lower operating profitability will continue," along with "higher funding costs and working-capital requirements, which are exerting pressure on operating cash flows of Indian retailers," he continues.

However there is a silver lining: "In the short-term, modern retail businesses certainly need to become smarter and leaner to sustain themselves, but in the long term, the trend is positive," said Dutta.

(Sourced from just-food.com.)

McCafe to make India debut, will it attract consumers?

Farah Bookwala, Moneycontrol/CNBC TV18

Mumbai, October 11, 2013

McCafé is the coffee-house chain owned by McDonald’s Corporation. It has a worldwide presence. Hardcastle Restaurants, the master franchisee of Mcdonald’s in Western and Southern India, will open the first McCafé outlet in India in Mumbai on Monday at SOBO Central Mall.

Hardcastle Restaurants is a 100% subsidiary of Westlife Development Ltd, a company listed on the BSE. Hardcastle Restaurants plans to set up around 100-150 McCafé restaurants over the next 3-5 years in metro cities of west and south India.

For Hardcastle Restaurants, McCafé represents a host of opportunities. Incremental revenues, a chance to enter into premium segments such as coffee and confectionary, and that too, without extra rental costs, as McCafé outlets will be located within existing McDonald’s outlets.

Typically, a McCafé outlet will be spread over 500 square feet within a 4,000 square feet McDonald’s outlet. The McCafé outlet will have an ambience of a premium café, and the company will spend nearly 30-35 lakhs per outlet on interiors and refurbishments. For customers, McDonald’s India believes, it is an opportunity to get the best of both worlds at the same location. McCafé will offer a menu comprising of beverages such as cappuccinos, lattes and espressos along with a selection of cookies and muffins.

Amit Jatia, Managing Director, McDonald’s India (west & south), says, “It not only provides another beverage option to our customer, but with their meal, if they decide to have a frappe instead of another carbonated drink, I think that is one option.”

But experts are skeptical of this possibility. McDonald’s is largely seen as a value meal chain and McCafé’s menu starts at upwards of Rs90. While beverages will range from Rs90 for a latte or cappuccino, frappes will start at Rs110. Arvind Singhal, chairman, Technopak Advisors says, “If the customer’s average meal size in terms of spending is in the range of Rs40-60, would that customer also be tempted, or some of those customers be tempted, to move into a separate area and pay Rs90 for a cappuccino? I would be very, very skeptical about this possibility.” This price positioning pits it against recent entrant, Seattle-based Starbucks. And Singhal feels, this puts McCafé at a disadvantage. Singhal says, “McDonald’s is certainly not seen as aspirational in the context of a premium pricing product. The same customer, would he be willing to consider McDonald’s a cheaper alternative to Starbucks? I certainly find challenges accepting this.” So, with high prices and a shop-in-shop format, experts feel McDonald’s will find it hard to create a mark either as a premium coffee chain or capitalize on McDonald’s value priced customers.

But other experts feel the wide food and beverage menu McDonald’s can now offer, at one location, gives it a leg up over other players. According to Devangshu Dutta, chief executive, Third Eyesight, “If the operating framework is right, it will allow McDonald’s to add revenues organically and also by nibbling away customers who may be going to other outlets by offering them a combination of meals which a neighbouring outlet will not be able to offer.”

(Sourced from Moneycontrol.com.)

After Bharti, Walmart in no hurry to get into retailing; cash-and-carry stores remain winning formula

Rasul Bailay, The Economic Times
New Delhi, October 10, 2013

Wal-Mart Stores, after its break-up with Bharti Enterprises, does not have any immediate plan to get into retailing in the country, making India the only market where the world’s largest retailer will limit itself to the wholesale space. Why?

Walmart officials in India say the company has found a winning formula in the Best Price Modern Wholesale chain. They even say that the Bentonville, Arkansas-based giant is so bullish on the format that it plans to export the formula to other emerging countries in Africa and Asia.

Analysts say focusing on the 20 Best Price cash-and-carry stores is the best option for the US giant as the business has proved lucrative and finding partners for retail entry will take time.

“The current regulations mean Walmart would need an Indian partner to set up retail operations and, keeping in mind their discussions with other major Indian players, that would take a while. So, going ahead with the 20 stores they have for the cash-and-carry model seems to be the most logical thing to do,” Devangshu Dutta, chief executive at retail consultancy firm Third Eyesight, said.

“This will help them attain a critical mass in India in setting up a retail business, if they wish to, in future. It will also help them achieve a comfort level in working in the Indian environment,” he said.

Walmart got into wholesale business in India by default, because that was the only space foreign retailers were allowed to operate in when it entered the country. India allowed FDI in multi-brand retail space only last year.

But, thanks to several tough riders, big supermarket chains such as Walmart and Carrefour have yet to enter the space despite the government making the norms easier since.

The cash-and-carry business, in comparison, comes without any restriction on foreign investment, and offers huge growth potential. Industry officials estimate it will be a $22-billion (about Rs 1,36,000 crore) business in India by 2017 and the market leader can eye revenues of about $5 billion (about Rs 31,000 crore) then.

Sam Walton, the founder of Walmart, launched Sam’s Club wholesale chain 30 yeas ago. Today, there are 700 membership-based Sam’s Club. In the US, they can sell to all bulk customers, including consumers.

However, regulations in India do not permit cash-and-carry to sell products directly to consumers and such venture must restrict business to retailers and businesses.

Yet, the business has proved highly lucrative with thousands of mom-and-pop storeowners in the country finding cashand-carry outlets more convenient than local wholesale markets.

Reliance Retail is also bullish in this space and plans to roll out dozens of wholesale outlets. Also, by going solo, Walmart can ensure it complies with anti-bribery norms of the US government.

Bharti Walmart has not opened any store for a year and dismissed some officials because of an internal probe to check if the India unit has violated the US Foreign Corrupt Practices Act, which prohibits American firms from bribing government officials in foreign countries.

In a joint statement announcing the break-up on Wednesday, Walmart Asia head Scott Price said, “We will continue to make important social and environment contributions to India, seeking conditions that will boost retail FDI in India.”

Walmart’s Bumpy Indian Safari

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.)