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A Slew of Break-Ups in the Retail Space

Rashmi Pratap & Purvita Chatterjee, The Hindu Businessline
Mumbai, October 9, 2013

starbucks mumbaiIt is the season of break-ups in the Indian retail space. In the last two months, three joint venture partners have decided to part ways in the market pegged at $520 billion.

The reasons range from regulatory issues to alleged misconduct by one partner. But the real cause often is the distribution of profits and control over business, which can lead to the end of a partnership.

While there have been many instances of partners calling off joint ventures in the past decade, the most recent ones are Bharti Walmart, Di Bella Coffee and McDonald’s.

“Joint ventures are breaking up due to differences in the direction the business should take in terms of investments and scale,” said Devangshu Dutta, MD of retail consultancy firm Third Eyesight.

Why this happens is not difficult to fathom. Foreign firms need an Indian joint venture partner to study the market, put the back-end infrastructure in place, evolve store location strategy and get the multiple regulatory approvals.

Once all this is done and business is stabilised, future growth direction and profit division becomes a bone of contention.

DISTRIBUTION OF SPOILS

“If there is a business going on successfully, both parties want a larger share for themselves. “And who has contributed more to the business becomes a point of argument. Moreover, foreign firms want more control at some point in time,” says an analyst on condition of anonymity.

In the case of McDonald’s, the company has alleged that Indian partner Vikram Bakshi was not devoting enough attention to business, besides levelling other charges.

The case is now before the Company Law Board. “Joint ventures don’t work for a long time in India. In most cases, it is a marriage of convenience and at some point, differences of opinions are bound to arise,” said Arvind Singhal, Chairman of Technopak Advisors.

“In the case of Bharti Walmart, since 100 per cent FDI is already allowed in cash and carry, it would straightaway give Walmart control after buying out Bharti in the joint venture,” said Dutta.

Singhal said what also caused Bharti and Walmart to part ways was the regulatory fatigue the two partners were facing. “They (Bharti and Walmart) seem to have run out of patience. Doing retail business in fresh produce is increasingly becoming complex,” he said.

Despite promises, the Government has not scrapped the APMC Act, which allows only the State governments to set up markets for fresh farm produce.

Singhal said Indians usually turn a blind eye to harassment but in other countries, laws are far more stringent and the liability of the foreign partner could be much higher.

It is to protect themselves in their own country that they prefer to break-up the moment an allegation surfaces.

Whatever the reasons, foreign partners don’t usually leave India. They either go solo or find another partner to ensure that they don’t miss the action in one of the world’s largest consumer markets.

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