Why Has Wal-Mart’s Focus Shifted Back To India?

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The dominance of Wal-Mart (NYSE:WMT) in the U.S. is relatively undisputed, but the retail giant has yet to prove itself in many foreign markets. The international segment represents about 26% of the company’s total revenues. Wal-Mart had 6299 international stores in 2015 and we forecast this figure to grow to 7412 by the end of 2020.  In its recent earnings, Wal-Mart’s international segment reported $28.6 billion revenue with operating income of around $2 billion, whereas the U.S. segment reported revenue of $76.2 billion with operating income of $4.5 billion. Wal-Mart’s international segment is also growing relatively slowly. Wal-Mart’s U.S. revenue grew at a compound annual growth rate (CAGR) of 3.0% from fiscal 2012 to 2015, while the international segment declined at a CAGR of (3%). Overall, Walmart’s revenue growth came in at a slower 1.0% over the period.

Why Focus On International Expansion?

Wal-Mart already operates in all 50 states in the U.S., Washington D.C. and Puerto Rico, with three primary store formats, as well as digital retail. It has already largely saturated the domestic markets in terms of expansion. Moreover, the U.S. population represents only around 5% of the total world population. Therefore, Wal-Mart has ventured into the international domain to capitalize on the rest of the world’s potential customers and grow its sales further. Wal-Mart already operates in 27 countries outside the U.S., and is likely to invest further in that expansion.

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How Can India Be Important?

India is the second most populated country in the world with over 1.2 billion people. The retail market is relatively nascent and still untapped by many major chains, and is primarily comprised of smaller local retail stores. Being a developing economy, India has a huge scope for improvement in the supply chain and offers a platform for growth in discount retailing because of the relatively lower (but growing) average disposable incomes. According to advisory firm Technopak, the food and grocery industry in India is now worth $383 billion and is expected to touch $1 trillion by 2020. [1] This is the market that Wal-Mart plans to target.

Despite the sheer size of the retail industry in India, big box retailers such as Wal-Mart make up a small portion of the market. As of July 2016, organized grocery retail (comprised of big box retailers) accounts for 8% of the total market, but that share is expected to grow to 24% by 2020. [2] This presents a significant opportunity for Wal-Mart.

Story So Far – Focus On Cash And Carry Business

In 2007, Wal-Mart entered into a partnership with Bharti Enterprises to build and operate cash-and-carry superstores under the banner Best Price Modern Wholesale. Under this joint venture, the two companies built 20 superstores in nine states across the country. But the two companies parted ways in October 2013, and have been operating independently since then. Wal-Mart had to halt its expansion plans in the country, and was operating these 20 superstores without the benefit of any partnership since then.

It has not been a smooth road for Wal-Mart in the country. The Indian government required the retailer to source from small local suppliers, which was difficult for the company due to its huge size. The Indian government also initiated investigations against Wal-Mart for a possible breach of the country’s foreign investment rules during the same period, due to its rule that foreign companies can only hold up to a 51% stake in local chains [3]. But with no restrictions on foreign ownership of wholesale stores, Wal-Mart has been opening outlets in the country and also announced its plan to open 500 outlets in the next 10-15 years. [4].

Recently, the Indian government allowed 100% foreign direct investment (FDI) in food retail, including through e-commerce in June 2016. This step could allow Wal-Mart to concentrate on its food business in the country. The company has already built strong back-end infrastructure in food through its wholesale stores in the country.

What Next : Shift to E-commerce?

Wal-Mart has reportedly been evaluating the possibility of teaming up with India’s largest e-commerce company, Flipkart, to grow its online presence in the country. [5]. The company may buy a small stake in Flipkart, which could help Wal-Mart grow its e-commerce presence in India with the help of Flipkart’s fast-growing user base.

The value addition of Wal-Mart’s expansion in India will likely be relatively minimal in the short term, but it could have a significant impact on company’s stock going forward due to the size of the Indian market.

Have more questions about Wal-Mart? Please refer to our complete analysis for Wal-Mart

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Notes:
  1. Online Grocery In India Finally Takes Off, yourstory.com, Sep 2015 []
  2. Retail Industry In India, ibef.org, July 2016 []
  3. Wal-Mart, thwarted by India’s retail restrictions, goes big, latimes.com, sep 2016 []
  4. Walmart opens 21st wholesale store in India, livemint.com, Aug 2015 []
  5. Will Walmart provide money power for Flipkart To Take On Amazon, Firstpost.com, Sep 27 2016 []