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
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.)