Entry of International Retailers and its Impact on Indian Retailing - case of Wal-Mart

DR.CYNTHIA MENEZES READER CANARA BANK SCHOOL OF MANAGEMENT STUDIES BANGALORE UNIVERSITY BANGALORE Mobile # 9902554503 Email: [email protected] S. HARISH BABU RESEARCH SCHOLAR CANARA BANK SCHOOL OF MANAGEMENT STUDIES BANGALORE UNIVERSITY BANGALORE Mobile # 9901540808 Email: [email protected] S. MANJUNATH RESEARCH SCHOLAR CANARA BANK SCHOOL OF MANAGEMENT STUDIES BANGALORE UNIVERSITY BANGALORE Mobile # 9901159460 Email: [email protected]

Abstract
This study is of particular importance to the Indian Retail sector context as it brings in one of the largest retailers in the world to India and is bound to affect the retail industry and the Indian economy as a whole. Moreover it adds on empirical evidence to the research objective by understanding the prospects and impact of FDI in the Indian retail sector from Wal-Marts perspective. Literature provides a lot of evidence (both positive and negative) to support how foreign companies can impact a country. Analyzing different authors view point; I have summarized the impact a foreign retailer can have in three main areas on its economy, the industry, and consumers. Wal-Mart, one of the biggest retailers in the world, having an international presence in a number of countries, was a perfect example to support my study. Facts from various reports, articles and the interview conducted helped in preparing a case study on why Wal-Mart should enter India and how its entry would impact the Indian economy. Summarizing the case, there are mixed opinions on Wal-Marts entry in India. However to all the criticisms, sources from Wal-Mart have counter arguments to support their entry. For instance one of the critics of Wal-Mart said Please dont look at Wal-Mart coming to India as a step forward. It is, in fact, 10 steps backward for us. There are tons of other Indian businesses that are looking to expand to the retail sector.

1. Introduction This study is of particular importance to the Indian Retail sector context as it brings in one of the largest retailers in the world to India and is bound to affect the retail industry and the Indian economy as a whole. Moreover it adds on empirical evidence to the research objective by understanding the prospects and impact of FDI in the Indian retail sector from Wal-Marts perspective. 2. Company Information Wal-Mart Stores, Inc., founded by Sam Walton in 1962, is one of the largest retailers in the world. During its conception, Sam Walton declared that the companys three policy goals would define its business: respect for the individual, service to customers, and striving for excellence (Hayden, Lee, McMahon and Pereira, 2002). The first Wal-Mart store opened in Rogers, Arkansas, in 1962 and seventeen years later, its annual sales topped $1 billion. By the end of January 2002, Wal-Mart was the worlds largest retailer, with $218 billion in sales (Achtmeyer, 2002). Currently, it operates over 4,150 retail stores globally with an international presence in 10 countries, which includes three Asian countries - China, South Korea, and Japan and dominant retail stores in Canada, Mexico, and the United Kingdom (Confederation of Indian Industry (CII) and PricewaterhouseCoopers India). 3. Wal-Marts strategy Wal-Marts strategy is discussed under two heads Marketing and growth strategy. 3.1 Marketing Strategy It aims to guarantee everyday low prices as a way to pull in customers (Achtmeyer, 2002). John Fleming, the chief merchandising officer, and Stephen Quinn, the chief marketing officer said, that after intense research, Wal-Mart is seeing its 200 million customers in three new groups - "brand aspirational" (people with low incomes who are obsessed with names like Kitchen Aid), "price-sensitive affluent" (wealthier shoppers who love deals), and "value- price shoppers" (who like low prices and cannot afford much more). These categories enable Wal-Mart to not only understand how people shop at its stores, but why they shop the way they do (Barbaro, 2007). 3.2 Growth Strategy A strategic goal of Wal-Mart is to expand and it has done so successfully (Hayden, Lee, McMahon and Pereira, 2002). Internationally, it is very selective in entering foreign markets. It began its global operations in 1991, in neighboring Mexico followed by Puerto Rico, Canada, Argentina and Brazil.

Fourteen years later after it went overseas, its international presence confined to just ten countries and India would be the eleventh once Wal-Mart sets its retail chain there (Saraf, 2005). To summarize, Wal-Marts competitive strategy is to dominate every sector where it does business by selling goods at low prices, outselling competitors, and expanding. Wal-Marts only presence in India has been through its sourcing office located in Bangalore. It has been very eager to get a foothold in the Indian market, the second most-populous nation and fourth largest retail market, also reckoned as one of the fastest growing retail markets in the developing world. India is already Wal-Mart's fastest growing sourcing market and according to Wal-Marts research, a huge organic growth opportunity lies ahead for Wal-Mart in the future as its home market becomes increasingly saturated (Bhatnagar, 2006). Wal-Mart is choosing a different modus operandi for expanding. Rather than acquiring a store estate outright, it is using the joint venture route in India, to enable it to utilize the local know-how and managerial expertise of Indian economy. Local contacts will enable it to extract the best supply chain deal and help in cultivating relationships with wholesalers, suppliers and producers in the country (Writer, 2007). 4. Wal-Mart in India Wal-Marts only presence in India has been through its sourcing office located in Bangalore. It has been very eager to get a foothold in the Indian market, the second most-populous nation and fourth largest retail market, also reckoned as one of the fastest growing retail markets in the developing world. India is already Wal-Mart's fastest growing sourcing market and according to Wal-Marts research, a huge organic growth opportunity lies ahead for Wal-Mart in the future as its home market becomes increasingly saturated (Bhatnagar, 2006). Wal-Mart is choosing a different modus operandi for expanding. Rather than acquiring a store estate outright, it is using the joint venture route in India, to enable it to utilize the local know-how and managerial expertise of Indian economy. Local contacts will enable it to extract the best supply chain deal and help in cultivating relationships with wholesalers, suppliers and producers in the country (Writer, 2007). Indian telecom firm Bharti Enterprises and US-based retail giant Wal-Mart agreed on a 50:50 joint venture for a new chain of wholesale stores in India to serve small retail shops. The "partnership of

equals" is named Bharti, Wal-Mart Private Ltd (Times of India, 2007). It is termed as the partnership of equals as it would be a partnership of two very well respected companies in their own rights. Wal-Mart plans to open "hundreds" of Wal-Mart- branded superstores across India in five years starting in 2007, working with Bharti Enterprises, a company that runs the leading Indian cell phone operator, said the Bharti chairman, Sunil Mittal. According to the deal, the stores will be owned by Bharti but operated under the Wal-Mart names, with logistics, purchasing and support from Wal-Mart itself. The new Joint Venture will have six board members, three from each side. It is looking at 10-15 wholesale stores in India over the next seven years with the first store scheduled to come up in the second half of 2008. The size of the stores will vary between 50,000sq ft and 100,000 sq ft and the investment could vary anywhere from $30 to $200 million, with Bharti to invest $2-2.5 billion in the front end retail over a period of time It will sell a range of products to various B2B consumers, including retailers, hotels and restaurants or any organization that has a sales tax registration. The product range will include groceries, consumer appliances, fruit and vegetables. It will customize its operations in the Indian market as per local requirements. In order to ensure that the manufacturers in India make the best out of Wal-Marts presence, it will source 90% of its products locally, with the remaining 10% from some other low-cost countries like China. Finally, in order to keep up the quality standards and make sure that Indian suppliers match up to Wal-Marts international quality standards, it may even invest in some of the manufacturing units (Timesnow, 2007). On Wal-Mart being Bhartis partner in the joint venture, Bharti has forged a deal with the worlds best retailer. Bharti classifies Wal-Mart as its natural partner because it brings with it world class processes and technologies in the supply chain, logistics and cold chain, thus delivering immense value to both small and big retailers by driving down prices (Times now, 2007). Moreover, the ssize with which WalMart wanted to enter the Indian market, Bharti had similar plans for the Indian market. Wal-Mart would help Bharti revolutionise retail with its speed, scale and size (Thomas and Chakravarty, 2007). Wal-Mart chose Bharti as its partner for the deal for the following reason. Although, Bharti had no experience in discount and grocery stores category, it is the No. 1 cell phone company in India with a vast retail distribution network and immense knowledge of the buying behaviour of India's middle class. Moreover, Bharti has a good flow of cash, which would support Wal-Marts expansion plans (Giridharadas and Rai, 2006). The world's largest retailer and one of India's most aggressive companies and the No 1 cell phone operator would thus make a formidable combination (Giridharadas and Rai, 2006).

With this deal, Wal-Marts mission is almost accomplished. It was lobbying entry in the Indian market for very long and the joint venture enables it to get a toe hold in the Indian market, although serving individual customers may still be far away. However, whats more important is that Wal-Mart is entering a large country Germany and Korea limiting growth, India remains the only large market where it can look for additional revenue (Timesnow, 2007). 5. Prospects for Wal-Mart in India

According to John Menzer, "India represents a $250 billion retail market, growing 7.2 percent a year, but modern retailing is just starting to emerge. This shows that India is a huge organic growth opportunity for Wal-Mart. (Bhatnagar, 2005) The eclectic paradigm discussed in the literature review describes that a firm which satisfies ownership, location and internalization advantage, chooses to conduct its operations on an international scale. It is noticed that India offers Wal-Mart prospective opportunities to expand its operations here. For instance, Wal-Mart has some very unique tangible and intangible benefits like brand name, technology, supply chain, operations and management which offer it ownership advantages. All the ingredients for a retail revolution are present - extraordinary demographics, surging disposable incomes and an increased propensity to spend rather than save (Reddy, 2005) suggesting that the future is alluring for Wal-Mart. To further reap the benefits of such advantages, Wal-Mart should internalize its operations. However, Indian regulations for FDI impose certain restrictions and rather than Wal-Mart having unique ownership, it has come up as a joint venture with an Indian player Bharti. 6. Impact of Wal-Marts Entry in India According to the benign model of development, FDI results in rise in productivity by supplying more capital, effective management, and marketing and technological practices which leads to increase in national saving and generates economic growth (Gillis et al, 1996). Wal-Marts entry would bring in huge capital investment along with expertise, technology and management practices required for setting their operations. This will enhance the development in retail industry and spur economic growth. According to the Malign Model of development, foreign investments bring in technological know how which is important for economic progress. Wal-Marts entry will definitely bring in the technological know how that it has developed over years with its experience in the retail industry worldwide, thus leading to economic progress. The impact Wal-Marts entry would have on the Indian market in three main spheres has been described earlier in the literature review in three main segments- Economy,

Competition and Consumers. Here, I will consider the impact from Wal-Marts perspective. To further support the facts stated in the case, comparisons are made with the impact Wal-Mart had on the Chinese economy. Wal-Mart China is used as a comparison since there are a lot of similarities between the Indian and Chinese economies such as both are developing nations, a huge population and a diverse consumer base to mention a few. 6.1 Impact on Economy In the process of expanding its operations, Wal-Mart would benefit many other industries in the supply chain, both backward and forward, eventually benefiting the Indian economy. For instance, according to Li Fei, a retail marketing professor at Tsinghua University, Wal-Mart helped in Chinas transition from state planning to free markets and to bring its economy into the 21st. 1. According to Wal-Mart officials, their entry would lead to a rise in the Indias Gross Domestic Product. This view is supported by Bloombergs report, as with Wal-Marts entry, Indias sales through retail chains, as opposed to traditional family-run stores, is expected to reach around 35% of the total by 2015, from about 4% currently. 2. Wal-Mart suggests that with their entry, there would be a direct impact on lowering of Indias inflation rate and reducing the poverty. This is because a big retailer like Wal-Mart works on a mass buying approach, which in turn, enables them to achieve economies of scale, leading to reduction of prices, the benefit of which is directly passed on to consumers, and thus resulting in lowering the inflation rate. This view is supported by Frank Stephenson, and according to his study, without Wal-Mart, about half a million of the Chinese people each year would be stuck in rural poverty that is, for most of them, far worse than sweatshop labor. Michael Strong also states that Wal-Mart might well be single-handedly responsible for bringing about 38,000 people out of poverty in China each month, whicturns out to be a whooping number of 460,000 per year (Stephenson, 2006). 3. It will boost up sales of a lot of other businesses linked to it - a cyclical approach whereby there will be creation of wealth across the chain. Its dependence on a number of suppliers like farmers, agriculture, transportation, pharmacy, FMCG, etc to name a few will boost productivity in each of these sectors It will have a significant impact on the lives of farmers and small scale vendors, by teaching them new techniques for improving productivity and providing them with ready market access for their products.

Its impact on local business is based on the philosophy of operating globally and giving back locally. Nurturing local producers has already had an extremely positive impact on modernizing and enhancing the food value chain. It is keen on sourcing food and dairy products from India and ready to bring in high-end technology, invest in cold chains and address issues such as contract farming. However for it to increase the volume and range of goods sourced from India, the best way is to have retail stores in India (Confederation of Indian Industry (CII) and PricewaterhouseCoopers India).

Retailing is one industry which directly influences the industry for infrastructure as it requires moving goods efficiently from one place to another. Wal-Marts investment in India will directly boost up the freight industry, railways, ports and shipping and pipelines. 4. It will directly influence the countrys employment. Regarding employment creation, Wal-Mart suggests their entry will result in creating jobs in the following ways A Foreign retailer will always be a foreigner and will have to source local talent to understand the local market. This would result in drawing talent from the country for staffing its organization. Wal-Marts entry will not only result in creating employment for the higher end workers but also for semi-skilled and unskilled workers. Talent will not only be drawn from metros, but the whole of India including smaller towns. Thus whether a retailer is Indian or Foreigner, net impact would be employment generation. Despite the fact that Wal-Mart feels employment will be created in each of the above sectors, there have been criticisms regarding the extent of employment losses that would result from Wal-Mart's entry into India. The fact that Wal-Mart's turnover per employee is about 95 times that of an average Indian worker in the retail business gives an indication of what to expect from Wal-Mart in terms of employment (Sridhar, 2007). In an interview with Business Standard, anti Wal-Mart activist Wade Rathke, said that in most of the countries where Wal-Mart operated, it had a negative impact on the labor practices. For instance, in Mexico and Argentina they have exploited workers by paying low wages, reduced employee benefits and enforced contractual employment. A classic argument which Wal-Mart has put forward to this criticism has been that their objective will be of eliminating the "middlemen", which will mean not only better realization by farmers but also lower prices for consumers (Sridhar, 2007). Also, it has been noticed that till date, sectors like insurance, banking, civil aviation etc which have been opened to private investment, have grown (Saraf, 2005).

6.2 Impact on Retailing Industry The Left parties that support the Congress-led coalition government in India, project the view that by allowing FDI in retail, foreign retailers would hurt millions of small shop owners of the unorganized retail sector. According to them, with the entry of foreign and big retailers, what would lie at stake would be the livelihood security of 12 million small shopkeepers, 40 million hawkers and at least 200 million (of the 600 million) small farmers a sacrifice not worth to be made for ensuring success of the organized or the big retailers (Sharma, 2007). This opinion of foreign retailers having a devastating affect on small shopkeepers, workers, farmers and consumers in developing countries is also supported by anti-Wal-Mart activist Wade Rathke. However, according to Wal-Mart, the fear that they would wipe out the familyowned shops is overstated considering the fact that it plans to open a few hundred stores across India which can never hope to meet the entire country's retail needs. Although, the middle class Indians in many cities will eventually go away from neighborhood stores and settle for the convenience of WalMart, but at the same time, given the sheer size and diversity of India's population, the small retail outlets will still survive for the foreseeable future (The Subcontinent, 2006). Another very interesting article by Ayyappa states how small kirana-walas can still afford to have an upper hand over the biggies like Wal-Mart despite their strategy of offering lower prices. Firstly, they have location benefits (stone throw away from the households), which enables families to fulfill their local needs without wasting time. Secondly, their effective home-delivery system enables consumers to place orders from home and get them delivered at their door steps. Thirdly, the local trader knows his consumer very well and greets them the moment they enter. This is a kind of relationship which Indians crave for as they tend to have more social life, compared to Americans who are more individualist. Fourthly and finally they are willing to gives their consumers credit. All these are certain advantages that these traders enjoy (Ayyappa, 2006). To all this, Wal-Mart has to say that once they are allowed entry and are able to establish their base, they will understand the Indian consumer better and try best to offer them localized services. Moreover comparisons with other developing economies reveal that that with flourishing modern trade and increasing global retailer presence, domestic competitors will still hold majority stake in the Indian market. For instance, in China, leading retail chains Carrefour and Wal-Mart have more than 100 stores, and still domestic competitors hold more than 90% of the market. Similarly in Mexico, in spite of the presence of global retailers including Wal-Mart, the number of retail outlets, including mom-and-pop stores, increased just by 2% (Confederation of Indian Industry (CII) and PricewaterhouseCoopers India).

Moreover, according to Wu Jiayi, a spokesman for the Chinese retail company Wumei Group Co Although locals feel some pressure from Wal-Mart, but at the same time they get a lot to learn from it as well. For instance, Wumei has more than 400 stores and is already fine-tuning its supplier relations, management practices and customer service based on lessons from the American giant. It copied the membership clubs that Wal-Mart pioneered at its Sam's Club stores, thus creating a dedicated core of customers. Also, by following the Wal-Mart example, small retailers like Wumei seek to expand nationwide. In the organized retail sector, Wal-Mart will face competition from some well established players like Big Bazaar, Subhikhsa, Star India Bazaar etc and upcoming players like Reliance. Kishore Biyani, founder of Pantaloon Retail (India) Ltd., the country's top chain with some $450 million in annual revenue,has been pressing to keep Wal-Mart out. "We are trying to close the back door and the front door," he says. He feels that it wont only be the existing established players that would pose threat to Wal-Mart, but players like petrochemical giant Reliance, as well which alone is planning an initial investment of $750 million to set up 1,000 hypermarkets. According to him, the more time it takes Wal-Mart to get clearance from Indian authorities, the better prepared its local competitors can be (Global Business, 2006). 6.3 Impact on Consumer Wal-Mart suggests that with their entry it is the Indian consumer who would be the greatest beneficiary as they would get wider variety, better quality products at relatively lower prices, lower price inflation, increased choice, greater convenience, better assortment and wider availability of goods. Wal-Mart has been recognized as a leader in supply chain management and for passing its savings on to its customers. Moreover, it is consequently credited for keeping inflation down in the United States, a direct beneficiary to consumers (Confederation of Indian Industry (CII) and PricewaterhouseCoopers India). Some studies suggest that the traditional mom-and-pop stores in India, accounting for about 97% of the total market in India, have developed indigenous processes and skills, and thanks to their unparalleled proximity, convenience and services offered, they might have an upper hand in retaining customers (Confederation of Indian Industry (CII) and PricewaterhouseCoopers India). To this, sources from WalMart say that, taking a cue from such stores competitive advantage, foreign retailers like them would have to and will eventually localize the existing service levels to match the Indian consumers expectations. For instance, in Wal-Mart China, meat is unwrapped because Chinese customers think it

looks fresher that way. This shows how Wal-Mart customizes its services locally to meet customers needs. Moreover, the consumer today is more aware and is willing to give a chance to newer formats. In order to be successful, Wal-Mart will Go Glocal adapt local practices with global standards.

7 Conclusion Literature provides a lot of evidence (both positive and negative) to support how foreign companies can impact a country. Analyzing different authors view point; I have summarized the impact a foreign retailer can have in three main areas on its economy, the industry, and consumers. Wal-Mart, one of the biggest retailers in the world, having an international presence in a number of countries, was a perfect example to support my study. Facts from various reports, articles and the interview conducted helped in preparing a case study on why Wal-Mart should enter India and how its entry would impact the Indian economy. Summarizing the case, there are mixed opinions on Wal-Marts entry in India. However to all the criticisms, sources from Wal-Mart have counter arguments to support their entry. For instance one of the critics of Wal-Mart said Please dont look at Wal-Mart coming to India as a step forward. It is, in fact, 10 steps backward for us. There are tons of other Indian businesses that are looking to expand to the retail sector. We should be supporting them rather than laying out the red carpet for one of the most deplorable ideas of business that has ever existed. Why make one of the richest corporations richer at our expense. - Indian Inheritance, 2006 To this, Wal-Mart defends by saying that, till when can you stop a country from growing. By allowing foreign retailers, India will benefit in terms of all the above discussed parameters or else by restricting entry, it would be deprived of all this. Wal-Mart is coming up in collaboration with an Indian player, thus its success will ultimately lead to success of an Indian company and the growth of the Indian economy. It is not bad to learn from the experiences of other countries, and with the experience, technology and knowledge Wal-Mart has of the retail industry, India should eventually benefit in the long run by learning from it.

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2. Barbaro, M. (2007) Wal-Mart shifting its growth strategy, International Herald Tribune, March 2nd 2007. 3. Bhatnagar, P. (2006) Wal-Mart's dilemma in India, CNNMoney, April, 2006-04-04 In http://money.cnn.com/2006/03/23/ news/companies/ walmart_india/index.htm 4. Confederation of Indian Industry (2005) The rising elephant: Benefits of modern trade to Indian economy, PricewaterhouseCoopers India, cited 30-07-09. 5. Gillis et al, M.(1996) Economics of Development, New York: Norton, 1996, Fourth Edition. 6. Giridharadas, A. and Rai, S. (2006) Wal-Mart plans to open hundreds of stores in India, International Herald Tribune, November. 2006-11-27. 7. Sridhar, V. (2007) Wal-Mart walks in, Frontline, January. 2007-01-12 in http://www.hindu.com/thehindu/fline/fl2326/stories/20070112002003700.htm (Accessed on 30th July 2009) 8. Times of India (2007) Wal-Mart, Bharti launch joint venture in India, Times of India, August, 2007-08-06.