Wal-Mart Stores Inc. (WMT:US), the world’s largest retailer, is in talks with partner Bharti Enterprises Pvt. about opening retail outlets in India after the government eased rules for foreign ownership in multibrand store chains.
It will take Wal-Mart, which operates 17 wholesale outlets in India in a tie-up with billionaire Sunil Mittal’s Bharti Enterprises, 12-18 months to open retail outlets in the world’s second-most populous country, Scott Price, head of Wal-Mart’s Asia operations, said in a Sept. 21 interview in Hong Kong.
The change in rules that now allow overseas supermarket chains to own as much as 51 percent in local ventures gives Wal- Mart an advantage over foreign competitors such as Carrefour SA (CA) because of the U.S. company’s ties with its local partner. Wal- Mart formed a joint venture in 2007 for wholesale stores and has been building a supply chain and logistics network in the country.
The company has been in dialogue on “the next steps,” Price said. “We will continue with the discussions with them as we try to understand the conditions of what they mean.”
It’s a “natural progression” to initiate talks with Wal- Mart for investment in Bharti Retail and in “front-end” stores, Rajan Bharti Mittal, managing director of Bharti Enterprises, said in a statement. Bharti Retail, operator of a chain of stores, is a fully owned subsidiary of Bharti Enterprises, according to its website.
$100 Million Investment
The retailer, based in Bentonville, Arkansas, can meet the minimum $100 million investment set by the government and the requirement for overseas companies to spend at least 50 percent of that on back-end infrastructure within three years, Price said.
India’s government on Sept. 14 decided to allow foreign companies to invest in multibrand store chains after limiting them to wholesale stores and outlets that sell a single brand.
The companies will compete for a market that Technopak Advisors Pvt., a consultant based at Gurgaon, near New Delhi, estimates will expand to $725 billion in 2017, from $505 billion this year.
Stores opened by these companies will only be allowed in states where the local government gives its consent and in cities with a population of more than 1 million people. In states where there are no such cities, the local government may choose where the stores may be set up, India’s government said.
Wal-Mart doesn’t expect getting approval from states to be a major hurdle in expanding in India and is counting on local administrations appreciating the benefits foreign retailers will bring, according to Price.
“The restrictions will become unnecessary in the future,” said Price. “India has huge opportunity to improve its infrastructure that the government itself has identified as priority, and modern retail is proven to help that process.”
Wal-Mart owns a 50 percent stake in the wholesale-venture with Bharti. Closely held Bharti runs its own chain of more than 186 Easyday stores including supermarkets. Bharti Airtel Ltd. (BHARTI), India’s largest mobile phone carrier, is a part of the Bharti group.
The U.S.-based retailer has yet to decide on the formats the company will use for its retail foray, according to Price.
“I can see that Easyday as a small supermarket has an opportunity to grow,” he said.
International retailers have been setting up wholesale operations to gain a foothold in India, where policy makers had been debating the ownership rules for retail for at least seven years. Carrefour, the world’s second-largest retailer, currently operates two wholesale stores in the country, while Germany’s Metro AG (MEO) has 11.
Tesco Plc (TSCO) has a franchise agreement with Trent Ltd. (TRENT), India’s third-largest retailer, and helps manage wholesale operations for Trent’s Star Bazaar hypermarkets.
Wal-Mart’s existing joint venture in India buys fresh produce directly from about 1,200 farmers in the northern Indian state of Punjab and helps them improve their yield through better farming techniques, Raj Jain, president of Wal-Mart’s India business said in an interview in June 2011.
Still, Prime Minister Manmohan Singh will have to overcome political opposition to the change in rule. The announcement came nine months after the government was forced to reverse a similar decision made in November after lawmakers forced repeated adjournments of parliamentary proceedings.
Mamata Banerjee, leader of the Trinamool Congress, on Sept. 18 announced that her party would withdraw its ministers from Singh’s cabinet. Six Trinamool Congress ministers submitted their resignations to Singh after the party withdrew its support to the ruling coalition.
The opposition also called a day-long strike in India yesterday, causing shops and businesses across the country to remain closed, to protest the government move to allow foreign investment in retail and a 14 percent increase in diesel prices.
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