News: Wal-Mart's Ambitions in India

(BW 09/02/2006) New York - Global retail giant Wal-Mart is still bullish on India despite bearish signals from the Indian government.

After trying for months to move into the world's second-most populous nation, the giant merchant won't be checking out of India just yet, in the opinion of Standard & Poor's Equity Research Services, despite a trade policy that prohibits foreign general merchandisers to set up shop there. Wal-Mart stated on Feb. 2 that it has applied to create a separate entity in Bangalore devoted to "market research and business development in relationship to the retail industry in India."

"I think that has been no secret that we think the market opportunity in India is really outstanding," Wal-Mart spokeswoman Beth Keck told the Associated Press on Feb. 2.

DOORS OPENING? "This is just another example of Wal-Mart's efforts to expand operations in India," says Joseph Agnese, an equity analyst with Standard & Poor's. "The company already sources a significant amount of goods from India. There is plenty of room for expansion internationally, in our view. The company is looking at India as one of many opportunities." Economists expect India to increase its gross domestic product by about 7% in fiscal 2006 (ending March). That's about the same as the country's income growth rate, estimated between 7% and 7.5%.

"Total consumption expenditure is likely to grow at over 6%," Siddhartha Roy, chief economist at Tata Group, estimated during a recent economic panel discussion.

The Indian government opened the doors of its retail market to 51% foreign direct investment (FDI) two weeks ago. But this most recent economic liberalization applies strictly to companies that sell goods through single-branded stores. The partial allowance permits a direct majority ownership interest by foreign entities, which, we think, is good news for many of the world's marketers of top labels.

GROWING MARKET. In S&P's view, the widely anticipated FDI policy for limited retail investment, however, effectively slams the "Closed" sign on big-box chains and particularly Wal-Mart, feared by India's Communist party as potentially putting mom-and-pop stores out of business by sheer virtue of its size. The retail behemoth rang up slightly more in retail sales for the year ending January, 2005, than the entire Asian subcontinent sold to its population of more than 1 billion, a quarter of whom live in poverty.

Still, Agnese believes that the FDI policy is a step in the right direction toward India opening its retail industry to 100% investment one day. Currently, annual retail sales in India are estimated at between $200 billion and $280 billion. Wal-Mart has been arguing that it is a prime candidate to benefit the most from retail FDI in India, where it has been lobbying for policy change while looking for an Indian joint-venture partner.

India's booming economy, consumerism, and middle class is a key focus for the giant chain. In June, John Menzer, then-president and CEO of Wal-Mart's international operations, devoted most of a 30-minute speech to an account of his recent trip to the subcontinent. "The consuming class has grown from 35 million families in 1996 to an expected 80 million [in 2005]. That's roughly in line with the U.S.," Menzer explained to shareholders and analysts.

BUYING IN. Wal-Mart's experience in emerging markets is the crux of its battle plan. Bentonville has been down this path of limited investment in retail before. Not too long ago, it battled anti-FDI sentiment in Mexico. In S&P's view, Wal-Mart won that battle. It is now the biggest private employer in Mexico and operates more than 780 stores in that country. And even in communist China, Wal-Mart operates 56 joint-venture stores as of Jan. 31.

The new India policy, while disallowing much foreign direct investment, does not prevent institutional investors from acquiring more than 51% of any Indian retail company. Foreign institutional investors (FII) can own 100% of Indian retail companies. Some Wal-Mart watchers say it may go the FII route, now that the FDI route is blocked.

Wal-Mart, however, says that's not the plan. "Wal-Mart executives still hope to be able to open up stores in India in the future," Agnese said, after speaking with Wal-Mart management about India plans. "When I asked about the possibility of Wal-Mart entering [India's retail sector] by taking an equity interest in an existing company, the response was that it currently is not interested in any existing operations in the country."

QUICK CHANGE. Ajit Dayal, CEO and chief investment officer at Quantum Advisors, an asset management company based in Bombay, says that foreign big-box retailers would have to surmount many operational challenges in India if they were to enter India directly or through an investment partner.

"We're not sure that what is considered a prime location for a retailer today is going to be defined as a central business district tomorrow. There is so much growth that centers of gravity within the time frames of available financing shift too quickly," he says.

Dayal believes that in addition to the pace of change that redefines business districts at an exponential pace, logistics on the size and scale that Wal-Mart is accustomed to would not be plausible to implement. He thinks that the current environment does not bode well for Wal-Mart or other big-box operations, based on the stark difference between the current benchmark for a typical retail store in India and Wal-Mart's traditional footprint. So while Bentonville remains positive on the subcontinent, its passage to India may be a difficult one.