Wal-Mart Stores Inc. (WMT:US) last year laid out plans to set up retail stores in India. The world’s largest retailer faces a setback to those ambitions after ending a six-year local partnership with billionaire Sunil Mittal.
The breakup will likely prompt Wal-Mart to put its Indian retail plans on hold and focus on building its wholesale business, Rakesh Gambhir, vice president at industry group Food & Grocery Forum India, said yesterday after the two companies disclosed they would end their joint venture.
Wal-Mart would need to find a new partner if it decides to enter the retail industry in India, where foreign firms need partnerships with local businesses to set up supermarkets. The split is the latest in the string of troubles for the Bentonville, Arkansas-based company in India, where it’s being investigated by the government and is conducting an internal probe on possible violations of U.S. anti-corruption laws.
“A lot of the players are going to look at this breakup, as something that happened because of Wal-Mart’s internal issues,” said Harish Bijoor, founder of retail consultancy Harish Bijoor Consults Inc.
Other foreign retailers may now be interested in partnering with Bharti Enterprises Pvt., which has an established retail business, said Bijoor.
In September last year, Scott Price, head of Wal-Mart’s Asia operations, said the company will take 12-18 months to open retail outlets.
The tie-up with the world’s biggest retailer would have given Bharti a lot of expertise in running retail chains, and the Indian company will be well placed to grow that business, said Saloni Nangia, vice president at consultant Technopak Advisors Pvt.
Wal-Mart agreed to buy out Bharti’s stake in the wholesale joint venture, helping it gain full control over 20 so-called cash and carry stores and their supply chain. The U.S. retailer plans to continue to expand this business in the country, according to yesterday’s statement.
These stores supply to neighborhood shopkeepers and businesses, and the segment “has huge potential,” Nangia said.
Under recently relaxed rules in India, foreign-owned retailers will have to buy 30 percent of manufactured products from small- and medium-sized local firms with less than $2 million invested in factories and machinery. Earlier rules were even stricter, defining “small and medium” companies as those with investments of under $1 million.
Even after these changes, the entry barriers for foreign retailers “aren’t workable,” Wal-Mart’s Price said in an Oct. 5 interview. The rules still don’t provide a level playing field for international retailers compared with local rivals, he said.
Price on Oct. 5 said the company isn’t talking to other partners and its relationship with Bharti was “very good.” Wal-Mart yesterday declined to comment further on partnerships in an e-mailed response to questions.
The two companies yesterday said they are also discontinuing their “franchise agreement in the retail business.” Bharti Retail runs a network of more than 210 large and medium-sized supermarkets in India called Easy Day.
Wal-Mart had invested 4.56 billion rupees ($74 million) in the compulsory convertible debentures in Cedar Support Services, a company controlled by Bharti Enterprises and a holding company for Bharti Retail. As part of the deal announced yesterday, Bharti will buy the debentures from Wal-Mart. The companies did not provide a transaction value.
The wholesale joint venture, which opened its first store in the northern city of Amritsar in May 2009, operates cash-and-carry outlets where only businesses with valid sales tax documents are allowed to shop after becoming members. Both companies own a 50 percent stake each in the venture, according to its website.
The two partners will now probably become competitors.
Bharti plans to open its own chain of wholesale stores, said two people familiar with the matter, who asked not to be identified because they are not authorized to speak to the media. Bharti, in an e-mailed statement, declined to comment.
Wal-Mart has lost top executives in India over the past year. In June, its chief executive officer of the India joint venture, Raj Jain, left the company amid government and internal investigations. His departure came seven months after the venture’s chief financial officer was suspended.
Jain will join Bharti Group as an adviser, the company said in an e-mailed statement yesterday.
An Indian government agency is investigating allegations that Wal-Mart violated rules governing foreign investment in the retail industry, Anand Sharma, minister for commerce and industry, said in December. A separate probe into allegations that Wal-Mart lobbied Indian government officials ended without any conclusions, according to a government document obtained by Bloomberg.
While the nation changed laws in September last year to allow foreign companies to own majority stakes in multibrand retail chains, no global retailer has sought such licenses yet. The government also eased rules covering sourcing, infrastructure investment and store location in August, in an effort to woo Wal-Mart, Tesco Plc (TSCO) and other global chains to open retail stores.
The reluctance of overseas companies to invest in retail operations has been a blow to the government of Prime Minister Manmohan Singh, which has battled capital outflows and a plunging currency this year.
Foreign investment “in multibrand retail is pretty much stuck now. No companies have outlined a clear plan even a year after government opened things up,” Dhvani Bavishi, an analyst at ICICI Direct, said. “Wal-Mart was expected to be the first, and now that’ll get delayed a lot.”
To contact the reporter on this story: Adi Narayan in Mumbai at firstname.lastname@example.org
To contact the editor responsible for this story: Stephanie Wong at email@example.com