Going forward, to what degree will Walmart be required to adapt its business model in India?

Case 12-2

Can Walmart Crack the Retail Code in India?

Walmart, the discount retail giant whose very name can strike fear in the hearts of small-town retailers in the United States, has gone global. To reach customers around the world, the company utilizes a variety of retail formats, including discount stores, supercenters that feature a full line of groceries and general merchandise, and Sam's Club, a warehouse operation offering goods in unbroken bulk packages. As Walmart extends its reach around the globe, observers are using words such as "assault" and "invasion" to describe what it's like for a nation on which the company has fixed its sights. As the chief executive of one supplier noted, "Walmart is going to change the retailing landscape internationally exactly the same way it's done domestically."

Not surprisingly, the BRICS (Brazil, Russia, India, China, and South Africa) nations are integral to Walmart's global expansion plans. In India, for example, strict government regulations once meant that the retail market was essentially closed to foreigners, but that situation is now changing. Walmart began its foray into that country by operating a liaison office in India from which it conducted market research and lobbied Indian policymakers. India's annual retail market is worth $500 billion, and analysts expect the retail sector to grow at a rate of 7 percent over the next few years. Today, more than 90 percent of retail activity is generated by small shops, newspaper kiosks, and tea stalls (see Exhibit 12-15).

Exhibit 12-15

This Bharti-Walmart store on the outskirts of Chandigarh, India, is a wholesale supplier to India's many small shopkeepers. In 2012, India agreed to open its market to foreign retailers such as Walmart as part of an economic reform program aimed at jump-starting growth in the country's sputtering economy. The reforms mean that Walmart will be able to open retail stores.

Source: Saurabh Das/Associated Press.

Regulatory reforms passed in fall 2012 will finally allow Walmart and other foreign big-box retailers to sell directly to consumers. Yet, despite Walmart's potential to transform India's retail sector for the better, some observers have concerns about the company's presence there. Western-style, big-box retailing is anathema to many Indian activists and policymakers, who fear that Walmart will drive some of India's millions of shopkeepers out of business. Legislators are also suspicious of the company's motivesan attitude that can be traced back to the colonial era and the operations of the British East India Company. Perhaps, they fear, the foreigners will raise prices after they have driven small operators out of business.

So why does Walmart persist? Because success in India is critical to CEO Doug McMillon global marketing strategy. Confronted with saturated markets in the United States and other developed countries, McMillon understands that the company needs to establish a bigger presence and build scale in emerging markets, such as India, where modern stores make up roughly 7 percent of the country's retail industry.

Global retailers that have set their sights on India face special challenges. As noted previously in this chapter, the term organized retail is used to describe activity by large branded retail chains such as Woolworths, Tesco, and Walmart. Such stores currently account for only a small percentage of India's nearly $500 billion in annual retail sales.

There have been many calls for regulatory reform, and some observers believe organized retailing will grow at a rate of 30 to 35 percent in the next few years. For now, however, some members of the ruling National Congress Party are concerned about the impact of organized retail on the millions of small-scale, "mom-and-pop" stores. The vast majority of Indian retail activity is conducted in cramped stalls with approximately 50 square feet of floor space.

Modernization of the sector is inevitable, although it has been slow in coming. Until the law was changed in 2012, Walmart and other global retailers that sell multiple brands were barred from participating directly in the Indian market. In 2006, Bharti Enterprises, a local business group that operates India's largest cellular network, announced a joint-venture partnership with Walmart. However, because of restrictions in place at the time, the venture consisted of wholesale stores. When single-brand retailers such as Benetton, Nike, Pizza Hut, Reebok, and Subway first came to India, they were required to use franchising as a market-entry strategy.

The recent regulatory changes will make it easier for such companies to have a majority stake in Indian operations. Even so, the deal comes with strings attached: The government has demanded that foreign retailers invest $100 million in India, with at least half the money going to "back end" operations and infrastructure, including cold storage facilities and transportation infrastructure. For its part, the government pledged more than $4 billion in infrastructure improvements. In addition, each of India's 28 states retains the right to approve or ban foreign-owned stores.

Western retailers often have to work with local vendors to help them improve their quality. For example, when the Bharti-Walmart venture was opening its wholesale cash-and-carry supercenters that serve small retailers, it had to contend with India's poor infrastructure and inefficient supply chains, which stem from producers using outdated techniques. Produce is typically transported on open trucks, horse-drawn carts, and tractors to wholesale markets in large cities. There, it passes through the hands of traders and agents licensed by the Agriculture Produce Marketing Committee. It is then transferred to smaller markets or warehouses that are not temperature-controlled. By the time it gets to consumers, the produce has passed through as many as seven intermediaries; perhaps not surprisingly, much of it is spoiled. In fact, according to government estimates, one-third of the country's produceworth $10 billionspoils each year.

In India, Walmart must do much more than just set up wholesale and retail stores. For example, it is trying to transform India's agriculture sector by using its hyperefficient practices to improve productivity and speed the flow of produce and other goods. Walmart and a partner, Bayer Cropscience, are working with farmers to improve yields and quality. In addition, Walmart has begun bypassing traditional middlemen by signing up farmers and sending its own refrigerated trucks to the farms. One reason farmers like working with Walmart: The global giant pays the farmers promptly.

Meanwhile, anticipating the arrival of the global retailers, local operators in India are investing for the future. For example, Pantaloon Retail Ltd., India's largest retailer, operates the Central and Big Bazaar department store chains and Food Bazaar, a supermarket chain. Kishore Biyani, Pantaloon's chief executive, has succeeded by giving lower-middle-class shoppers a familiar retail experience: cramped stores with an environment that Western shoppers would find chaotic. Large business groups such as Reliance Industries, a petroleum refiner, and Birla Group have also entered the retail sector. Meanwhile, Hindustan Lever, the Indian unit of packaged goods giant Unilever, has launched a consultancy service to help the "mom-and-pop" retail operators become more competitive.

During his tenure as Walmart's CEO, Mike Duke was undaunted by the challenges his company faced. In his view, the Indian people are missing out on the opportunity because of supply chain inefficiencies. But he expressed faith that, over time, the process, would get worked out. Meanwhile, Duke moved ahead in other key emerging markets. In Africa, for example, Walmart spent $2.4 billion to acquire a stake in Massmart, a chain with 288 stores in South Africa and 13 other African countries. Although South Africa's population numbers only 50 million, those people have embraced shopping, and the transportation infrastructure and banking and telecommunications systems are well developed. A successful market entry in South Africa will serve as a springboard for Walmart to expand throughout the continent. Needless to say, managers at local companies that win contracts to supply the global giant are hoping that they can tag along and join the global supply chain.