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.)

[This article appeared in Daily News & Analysis (DNA) on 10 October 2013, under the headline “Without Wal-Mart, can Bharti play it alone?”]

A year ago, Wal-Mart had called Bharti its natural retail partner in India. But today the companies have jointly and publicly changed their relationship statuses to “single”, calling off the 6-year old marriage. Bharti will buy out or retire Wal-Mart’s debentures in the 200+ store Easyday retail business, while Wal-Mart in turn will acquire Bharti’s stake in the 20-outlet Bestprice cash-and-carry business.

By some estimates, the split was imminent for perhaps a year or longer, as the pressure rose for the two companies due to multiple factors. Several regulatory changes governing foreign investment in the Indian retail sector made it difficult for Wal-Mart to acquire a stake in the existing retail business that the two partners had set up. Anti-corruption investigations in Wal-Mart’s India business (in addition to Mexico, China and Brazil), as well as questions around the legality of US$ 100 million worth of quasi-equity compulsorily convertible debentures issued to Wal-Mart at a time FDI was not allowed in multi-brand retail businesses brought down even more external scrutiny upon the joint business. And finally, pressure against foreign investment in multi-brand retail of basic goods such as food and grocery, continued to exist not just amongst opposition parties but also parties within the ruling coalition and individuals in the government.

The split means that Wal-Mart can now overtly take complete ownership of the Bestprice business, and drive it as it sees fit. The fragmented retail market and the myriad small businesses in India do potentially provide a large customer base for the cash-and-carry business if Wal-Mart chooses to be more aggressive. However, that may not happen immediately. The business has been coasting for over a year without new openings that were already planned and significant personnel changes have happened from the seniormost levels down. Wal-Mart’s investigations of corruption allegations continue and before committing more resources it will definitely want to strengthen systems so as to not be in violation of Indian and US laws.

On the other hand, if it wishes to now enter the retail business, Wal-Mart would also have to look for a new Indian partner to set up new retail stores in a separate company. Retail is capital-hungry so Wal-Mart would need a cash-rich partner who can accept a junior position in the venture in which Wal-Mart would clearly be the driver financially, strategically and operationally.

At this time Wal-Mart seems to have decided to take a step back and evaluate what the Indian market means to it right now and in the future, what sort of investment – both in financial and management terms – it demands, and what returns the investment will bring. It remains to be seen whether it will choose to grow aggressively, coast up incrementally or, in fact, take the next exit out of the market as it has done in some other countries earlier.

And what of Bharti? Will it be able sustain the retail play without Wal-Mart’s close operational guidance and financial participation, or will it choose sell the Easyday operation to another domestic investor? On its part Bharti has stated an ongoing commitment to the business, and has also hired the former CEO of the joint venture, Raj Jain, as a Group Advisor. A 200-plus store chain is sizeable and credible in India’s fragmented food and grocery market, and is seen by the group as “a strong platform to significantly grow the business”.

However, Bharti’s core telecom business is also capital-intensive and highly competitive, and it will be difficult at this time to sustain high-paced growth in another cash-hungry, thin-margin business such as grocery retail. For now the Group’s best bet would possibly be to consolidate operations, unearth more margin opportunities and take a call at a more opportune time whether to further invest in growth or to treat retail as a non-core business and exit it.

Creating a substantial, profitable retail business is a long-term play in any part of the world. In India, as retailers are discovering, it takes just that extra dose of patience.

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.

Nandita Bose, Reuters

Mumbai, October 9, 2013

* 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.