Wal-Mart Invests a Paltry $103 Million in India as Challenges Prevail

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Retail giant Wal-Mart (NYSE:WMT) invested $103 million in India in June to expand its wholesale network, according to a filing made by the retailer’s Indian unit to Registrar of Companies. [1] The company operates 20 wholesale stores in the country and plans to open another 50 in the next four-five years. Earlier this month, Wal-Mart rolled out a B2B e-commerce platform for small businesses in the cities of Hyderabad and Lucknow, marking its first online venture in India. [2] Due to stringent FDI (foreign direct investment) laws in the country, certain legal issues, booming real estate prices and peculiar consumer behavior, Wal-Mart hasn’t made hearty efforts to expand in India. Yet, the gigantic size of the Indian retail market has kept the retailer interested.

Wal-Mart had been interested in the $500 billion Indian retail market since 2006, but strict FDI rules did not allow it to set up multi-brand retail operations in the country. [3] However, the laws allowed 100% FDI in wholesale businesses, and hence the retailer entered the market in 2007 in a joint venture with Bharti Enterprises. Through this joint venture, Wal-Mart launched its first wholesale store in 2009 and gradually expanded this business to 20 stores in 2014. Meanwhile, the company was charged with violating investment rules in 2012, but it was later cleared by the Finance Ministry’s Enforcement Directorate. [4] In 2013, Bharti Enterprises called off the joint venture, which gave Wal-Mart complete ownership of its Best Price stores. [3]

Expanding in India is likely to remain a strenuous task for Wal-Mart given that current FDI rules are not favorable for its operating model. Moreover, Indians are not used to shopping at big retail chains due to a perception that they are more expensive than local kirana (grocery) shops. Also, consumers in India prefer to shop frequently for their grocery needs, and hence are unlikely to travel to the outskirts of a city, where a Wal-Mart store is usually located. High real estate prices and space constraints in urban markets won’t make it easy for the retailer to set up shops inside the cities.

Our price estimate for Wal-Mart stands at $79.30, which is less than 5% ahead of the market price.

See our complete analysis for Wal-Mart

Indian Market is Strongly Inclined Towards Unorganized Retail

Contrary to consumers in the U.S., Indians shop for groceries and other basic items on a daily basis. This can be attributed to the fact that they have access to a number of mom & pop shops, street vendors and hand-cart hawkers in their vicinity. They formulate the unorganized segment of the Indian retail market, which accounts for more than $450 billion in annual sales. On the other hand, organized segment including grocery chains such as Big Bazaar, Reliance Fresh and Easy day, and apparel chains such as Pantaloons, Shoppers Stop and Westside have close to 8% share in the Indian retail market. [5]

The dominance of unorganized retail in India is the biggest roadblock for Wal-Mart’s growth in the country. Even if the retailer expands its network adequately and creates sufficient visibility, it will have a tough time in attracting customers due to the prevalent perception that retail chains are more expensive than local stores. The most common perception among a number of Indian consumers is that a smaller store can offer cheaper products due to its lower operating expenses. Also, buyers prefer shopping at local stores for fresh food items since they maintain a very small inventory of such items, which is replenished frequently.

FDI Rules may be Threatening for Wal-Mart’s Price Leadership

Although the Indian government bent its FDI rules in 2012, allowing foreign retailers to raise their stake to 51% in an Indian company, it came with certain rules and regulations. The most significant of the lot was that foreign companies were required to source at least 30% of their raw material from small and medium enterprises in the country, whose investment capital was more than $1 million. [6] Although the government later raised the investment threshold to $2 million, it made little difference for Wal-Mart. [7]

The retail giant’s success story is centered on its ability to offer lowest prices in the market. It has been able to do so by identifying the most suitable vendors and squeezing the best price out of them. Since Wal-Mart will be required to source 30% of its inventory from small and medium Indian companies, it would not have much freedom in choosing its vendors. This can have a mitigating impact on its strong negotiating power, which can hamper its price leadership position.

Location of Stores will be an Issue

A traditional Wal-Mart store in the U.S. is located on the outskirts of a town due to its large size and lack of sufficient space within a city. This operating model has worked well so far given that U.S. buyers prefer infrequent stock up trips, and thus they have no problem in driving up to a Wal-Mart store. However, Indians are used to visiting grocery stores almost daily, and hence location of the store becomes crucial. If Wal-Mart follows the same strategy of opening large stores outside cities in India, buyers will be discouraged by the idea of traveling far. On the flipside, buying a large space within a city might not be conducive for the retailer given the significant amount of capital involved. Rising population in metropolitan areas has resulted in shortage of space, which has led to substantial rise in real estate prices.

For India, Wal-Mart’s Express format might be more lucrative than its typical large supercenters. The company can open them at convenient locations within metropolitan cities, where buyers are most likely to welcome a foreign retailer. However, such areas already have a decent presence of retail chains such as Easy Day, Reliance Fresh and Big Bazaar, who present a competitive threat for the retail giant.

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Notes:
  1. Wal-Mart adds $102.9 million in Indian wholesale business in June, Reuters, Jul 21 2014 []
  2. Wal-Mart India launches B2B e-commerce platform, Wal-Mart India, Jul 1 2014 []
  3. Wal-Mart, Bharti Enterprises call off Indian joint venture, Reuters, Oct 9 2013 [] []
  4. Wal-Mart Still Faces Challenges in India, The Wall Street Journal, Oct 19 2013 []
  5. Indian Retail Market, Deloitte, Jan 2013 []
  6. FDI in retail: Why 30% local rule is 100% trouble for MNCs, The Economic Times, Sept 30 2012 []
  7. FDI in retail: Is 30% local sourcing feasible? – YES, The Hindu, Oct 11 2013 []
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  • commented 5 months ago
  • tags: TGT WMT COST
  • This was expected - http://seekingalpha.com/article/2103643-wal-mart-stores-in-india-what-investors-should-know