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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.)

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