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July 7, 2013
Nandita
Bose, Reuters
Mumbai,
July 7, 2013
Wal-Mart’s India expansion is stalled.
When India announced last September that it would allow foreign
supermarket chains to take majority ownership of their Indian
operations, it marked a victory for Wal-Mart Stores Inc, which
had spearheaded efforts to open the market and said its first
retail store would open within two years.
Now, two sources within the Bentonville, Arkansas-based company’s
Indian unit say it is unlikely to apply for its first retail store
license before March 2015. The company has said it needs a further
12 to 18 months after winning government approval to open each
store, which means its first retail outlet in the country would
open in 2016 at the earliest.
Meanwhile, Bharti Enterprises, its local partner in an existing
wholesale business, is reconsidering its commitment to their joint
venture given the heavy investment requirement and distant prospects
for returns, four sources with direct knowledge of the matter
said.
Bharti denied that it is looking to exit the tie-up and said
it remains fully committed to the joint venture, and a Wal-Mart
spokeswoman declined to comment on what she called speculation.
The latest developments stem from an ongoing internal bribery
probe relating to its Indian operations, still-evolving rules
governing foreign participation in India’s retail sector, and
national elections due by May 2014 that could result in the controversial
retail reform being reversed – and any newly opened supermarkets
being shut – the sources said.
The delay and faltering partnership mean Wal-Mart may miss out
on the "first-mover" advantage in a country considered
the last great frontier for global retailers.
If Bharti pulled out, Wal-Mart would be forced to find a new
partner from a tiny pool of large Indian retailers to meet the
requirement that a local firm owns 49 percent of the business.
On June 26, Wal-Mart announced that Raj Jain, who led its India
push for the past six years, had left the company.
The world’s biggest retailer named Ramnik Narsey, who recently
joined the company after heading the Indian operations of Australia’s
Woolworths Ltd, as interim India chief, without explaining the
change. Jain did not answer repeated calls to his mobile phone
and the company declined to make Narsey available for comment.
Narsey headed the consumer electronics wholesale business of
Woolworths in India for fifteen months, before it was sold to
the Tata Group, offering little insight into what his appointment
might mean for Wal-Mart’s India rollout.
"It will take lot more than a management change to fix
things," said Devangshu Dutta, who heads retail consultancy
Third Eyesight. "Wal-Mart is being investigated for breaking
entry rules, bribery and these are problems that are much larger
than any individual or the changes he can quickly bring about,"
he said. Wal-Mart has said it is in compliance with India’s
foreign direct investment guidelines.
NO APPLICATIONS
The U.S. retailer is currently investigating bribery allegations
in its Indian operations.
With 1.2 billion people and 90 percent of its $500 billion in
retail trade done at mom-and-pop shops, India is potentially lucrative
for retailers such as Wal-Mart, Carrefour SA and Tesco Plc. But
no global supermarket chain has applied to enter because of regulatory
uncertainty.
Wal-Mart’s local joint venture partner Bharti, one of the few
large-scale retailers in India, is getting cold feet because of
the additional investment required to run retail operations.
Bharti, controlled by billionaire Sunil Mittal, wants to consolidate
its balance sheet and sharpen its focus on Bharti Airtel LtdIndia’s
biggest telecoms operator, which has $12 billion in debt, sources
said.
"The JV is under review. Bharti is taking a closer look
at it because it wants to move out," said a senior official
at Bharti Wal-Mart Pvt Ltd, declining to be identified.
With high costs and narrow margins, most big retailers in India
lose money. The Bharti Walmart wholesale joint venture lost 2.77
billion rupees ($48 million) on sales of 18.8 billion rupees in
2011, according to the most recent regulatory filing.
"Bharti will continue to look at divestiture," said
another source with direct knowledge of the matter. "The
plan is to make it a focused business rather than the hands and
legs going in all directions."
There is no certainty that Bharti will exit the wholesale joint
venture after the review, the sources said.
GRAFT CRACKDOWN
Wal-Mart’s internal crackdown on bribe-paying has also slowed
expansion plans in a country where paying bribes is seen as a
standard cost of doing business, according to Indian retailers
and industry officials. Reuters reported in May that retailers
in India often pay so-called "speed money" to smooth
the process of obtaining dozens of permits.
The U.S. Foreign Corrupt Practices Act forbids American firms
from paying bribes. Wal-Mart launched a global review of corruption
last year after a New York Times report on bribery at the company’s
Mexico operations. Its lawyers flagged India among the countries
with the highest corruption risk.
In November, Bharti Walmart, the company’s India joint venture,
suspended employees including the chief financial officer as part
of an internal investigation into bribery allegations in India.
More than 15 attorneys from U.S. law firm Greenberg Traurig are
now working with the Indian business to help strengthen compliance,
a Wal-Mart spokeswoman said.
Wal-Mart, which has run wholesale stores in India since 2009,
has not opened a new one since October despite its stated plans
to open eight in 2013. It has 20 such stores in India.
In response to questions from Reuters, Wal-Mart said its India
wholesale store rollout had encountered delays but did not say
how many it will open in 2013.
"We are in the process of implementing additional controls
for our new store permit and licensing program to ensure the process
is handled appropriately and in full compliance with all laws
and regulations," the Wal-Mart India spokeswoman said.
"As we develop and implement enhanced procedures for obtaining
licenses, there have been some temporary delays in store openings,"
she said in an e-mailed statement.
At its Rajahmundry wholesale store in the southern state of Andhra
Pradesh, Wal-Mart has not sold fresh fruits and vegetables since
October as it has been unable to acquire a license from the state
Agricultural Produce Marketing Committee, according to a company
source. APMC officials declined comment.
In the same state, Wal-Mart’s wholesale store in Hyderabad is
only open six days a week because it has been unable to secure
a 365-day operating license, the person said.
In both cases, according to the company source, the license has
been held up because Wal-Mart won’t pay a bribe.
"If you do not pay a bribe, who will do your work in this country? Have all the government officials in India become honest overnight? Nothing has changed," the company executive told Reuters, on condition of anonymity.
The Andhra Pradesh APMC and municipal officials declined comment.
(Additional reporting by Sumeet Chatterjee in Mumbai; Editing by Tony Munroe and Emily Kaiser)
