MUMBAI, India - Wal-Mart Stores said Wednesday that it is splitting from its Indian business partner and cannot move forward with plans for its own retail stores in India because strict government regulations on sourcing from local small businesses make it impossible.
The move by the world's largest retailer is a blow to Wal-Mart's expansion plans in India as well as the country's attempts to attract foreign investment in the huge but underdeveloped retail sector. Wal-Mart already runs a wholesaling joint venture in India and will continue that business, buying out partner Bharti Enterprises.
Wal-Mart did not name any other Indian partner — which would be necessary to open its own retail outlets — and comments from its top Asia executive indicated that plans to open its consumer superstores are indefinitely on hold because of government regulations.
Despite a potential market of 1.2 billion people, no large foreign chains have formally applied to open supermarkets and other multibrand stores in India since the government changed the law last year to allow them to invest more in the $400 billion sector previously reserved mostly for Indian companies. The new law allows international companies to open multibrand retail stores with 51 per cent ownership and an Indian minority partner. Foreign companies can operation 100 per cent-owned wholesale chains.
Opening the door to foreign retailers like Carrefour, Tesco and IKEA was hugely controversial in India, with opponents saying it could ruin millions of small traders and family-run shops where most Indians now buy their goods. To soften the blow, the new law requires foreign retailers to source 30 per cent of the products they sell from small and medium-sized Indian businesses.
Wal-Mart Asia CEO Scott Price said this week that the rule of sourcing from local small and medium businesses is the "critical stumbling block" to its plans to open retail stores in India.
"I don't understand how this 30 per cent small and medium enterprise can be executed," Price said in an interview Monday at the Asia-Pacific Economic Cooperation summit in Bali, Indonesia. He added that "on the front end, we cannot build a store unless we are able to comply" with the sourcing rules, a task he deemed unworkable under the current interpretation.
He said Indian retailers are not forced to follow the same rule — which makes it too difficult to make money because no enterprise small enough to meet the government's requirements has the capability to produce on the quality and scale that a large retailer requires.
"So it's a bit of a level playing field issue here," he said.
Bentonville, Arkansas-based Wal-Mart has long had trouble with its joint venture with Bharti Enterprises, and rumours of an impending split have been rife for months.
In June, Bharti-Walmart's CEO left and was replaced. In November, the company suspended several workers as part of an internal corruption investigation.
In a joint statement Wednesday, Wal-Mart and Bharti Enterprises confirmed they would dissolve the partnership.
Wal-Mart will buy Bharti's stake in the Best Price Modern Wholesale cash and carry business that has at least 20 stores across India and continue to operate it in India. Bharti will take 100 per cent ownership of the retailing joint venture Easyday.
"Bharti is committed to building a world-class retail venture and will continue to invest in Bharti Retail across all formats," said Rajan Bharti Mittal, Bharti's managing director. "We believe that with our current footprint of 212 stores, we have a strong platform."
Wal-Mart's stock was up 16 cents at $73.06 in early trading Wednesday on Wall Street.
Price insisted Wal-Mart has not given up on India, noting that he is still meeting with Indian officials in hopes of finding a way to meet the sourcing conditions.
"We want to serve India and its people, and continue to make important social and environmental contributions to the country," he said. "We will continue to advocate for investment conditions that allow FDI multibrand retail in India."
Kurtenbach reported from Bali, Indonesia.