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Why Walmart struggles in India

Fears of big retail are strangling growth.

Wal Mart India
An Indian Sikh worker cleans a section of cups inside the country's first ever Bharti Wal-Mart "Best Price" Modern Wholesale cash and carry store in the village of Manawala, some 11kms from Amritsar on May 30, 2009. (Narinder Nanu/AFP/Getty Images)

NEW DELHI, India — The timing for Walmart's first buyer-seller summit in India earlier this month couldn't have been better.

As Indian firms keen to tap the retailing giant's global network prepared their pitches, the Indian government gave the first concrete sign that it may be ready to open up its potentially huge retail market to foreign investors — an opportunity that America's largest retailer has been chasing for as many as 20 years.

It's not just big for Walmart, the company argues. "For India, the opening of retail would be a game changer," said Rajan Mittal, vice chairman of the firm's joint venture partner here.

Barred from opening retail stores in India, Walmart had been sourcing millions of dollars worth of textiles and other products here since 2001. Then, finally, after years of waiting for the world's next largest market to open its doors, the Arkansas-based company went around back — forming a joint venture with billionaire Sunil Mittal's Bharti Enterprises, best known as the operator of India's largest telecommunications network, Airtel. That gave Walmart the right to open wholesale stores in India and lay some groundwork through the Indian-owned Bharti Retail chain. But it wasn't exactly a sweetheart deal.

After opening its first retail store in China in 1996, Walmart swiftly ramped up to nearly 300 retail outlets, as well as 180 larger "supercenters." But in India, the company's Bharti-Walmart joint venture has due to restrictions managed only to open three so-called cash-and-carry stores — which sell in bulk to other retailers.

While Walmart's claim to fame is its supply chain, its best suppliers in India could only manage a score of 60 out of 100 by the company's standard, so it has to keep more inventory in India than anywhere else in the world. So, too, India's tiny grassroots retailers — the bread and butter of the retail sector — find that it's not worth their trouble to schlep out to the hyperstore.

Worse, it was barred from selling to the retail outlets of its joint venture partner, Bharti Retail. Until now.

On Sept. 29, India moved to allow foreign-funded wholesalers like Bharti-Walmart to sell as much as 25 percent of their goods directly to consumers through retailers that are part of the same corporate group. Though Mittal called the job "half-done," it gave Walmart a small opening through which to explore India's retail market. More significantly, the change in regulations provided the strongest hint yet that India's government may finally be ready to talk business on FDI in retail.

"Our intelligence is that there will definitely be some policy relaxation [soon] in terms of allowing multi-brand retailing to come in," said NV Siva Kumar, leader of retail and consumer industries for PricewaterhouseCoopers India. "There will definitely be some conditions attached, but some kind of calibrated opening is what we expect to happen."

There was a gold rush air at Walmart's first pan-India buyer-seller summit, held at New Delhi's Taj Palace hotel on Sept. 30.

A host of Indian agricultural companies — including biggies like ITC Ltd. Kohinoor Foods and Amul — had taken booths to woo Walmart and associated buyers from 13 different countries, including the United States and United Kingdom. Many firms, like South India-based Nani Agro, which recently gained a spot on Walmart's approved list as a supplier of turmeric, were pitching the rest of their product portfolio.

Despite India's position as the world's second-largest producer of fruits and vegetables, the country's total agricultural exports amounted to just $8 billion last year, compared with China's $40 billion. Help from Walmart and its associated firms to meet international standards and make global connections could change that, India's farm and food companies hope.

For retailers like Walmart, as well as French competitor Carrefour and U.K.-based Tesco, the stakes are almost as high, and they are hoping that the first calibration in India's retail FDI policy could come as early as November, when U.S. President Barack Obama is slated to visit. Last month, Francisco Sanchez, U.S. under-secretary of commerce for international trade, told the Financial Times that opening up India's retail market is high on the agenda for Obama's delegation.

And, so far, most signs appear to be positive. The Indian commerce ministry's department of industrial policy and promotion recently issued a discussion paper that outlined the positive effects that FDI in retail could have on India's economy. "We believe that it is an opportunity to multiply jobs," a junior trade minister told Bloomberg.

However, India's Business Standard newspaper, citing unnamed sources in the finance ministry, has reported that no change is likely now.

Opening retail is perhaps the only big ticket item left on India's agenda of economic reforms, and the very idea of India lies at the issue's heart.

For the first six decades of India's independence, tiny cottage industries enjoyed various advantages due to regulations inspired by the philosophies of Mohandas K. Gandhi (better known as Mahatma). Small was good, subsistence was in and scale was out. Opening up retail to bigger-is-better players like Walmart would be a radical departure, and small trader organizations and India's communist parties are fighting it tooth and nail.

Experts from consultancies and economic think tanks, however, argue that opening up retail to FDI would benefit Indian consumers, farmers and workers in several ways. India's retail market is already worth some $400 billion, according to Business Monitor International. But the so-called "unorganized sector" of tiny mom-and-mop stores accounts for perhaps 97 percent of the market. And while outfits like the Confederation of All India Traders say that absorbing those tiny stores into larger, organized chains will result in massive unemployment, the Indian Council for Research on International Economic Relations (ICRIER), which was tasked by the government to study the issue, found no evidence to support that claim.

According to the ICRIER study, big retail has little net effect on employment numbers. Moreover, large retail chains pay 25 percent higher prices for produce than farmers are able to get from the traditional market, and farmers selling directly to large retailers earn 60 percent higher profits — a remarkable fact considering that agriculture still employs two-thirds of India's 1.1 billion population.

But foreign funds could have an even larger impact. According to the Retailers Association of India, opening the retail sector to FDI would generate $20 billion in investment over the next five years. Much of that investment would go to improving transport linkages and developing the food processing industry, which could be a large employer and help cut the $12 billion a year's worth of agricultural produce that spoils before it ever reaches the market. According to ICRIER, small and medium sized companies in the textiles and clothing businesses would also get a huge boost.

PricewaterhouseCoopers' Kumar concluded: "It would be a terrific catalyst for trade."

http://www.globalpost.com/dispatch/india/101006/walmart-economy