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.)

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

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.)

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.)

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

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.”

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.)