With its domestic results flagging, Wal-Mart Stores took a giant step into a giant market on Monday, announcing it had arranged to enter India via a joint venture with a local company.
Wal-Mart Stores has signed an agreement with the business group Bharti Enterprises to "jointly explore business opportunities in India." Wal-Mart beat British retailer Tesco, which was also in talks with Bharti--India's leading mobile phone company--to set up operations in India. Bharti's joint managing director Rajan Mittal said the firm was initially also negotiating the French hypermarket chain Carrefour.
But Wal-Mart was the best strategic fit, he said, because of its focus on emerging markets like India and China. Wal-Mart's strategy is in line with Bharati's aggressive growth plans, Mittal said. He refused to give the details of the growth, but said the company hoped to roll out the first of its stores within a year.
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The venture will be "a partnership of equals," with Bharti handling the retail operations and Wal-Mart supplying the logistics, distribution and sourcing expertise. "The venture aims to set up hypermarkets, neighborhood stores and supermarkets in cities across India," Mittal told Forbes.com.
Bharti already has a joint venture, FieldFresh, with a unit of the financial house Rothschild, to export fresh produce.
Though Bharti and Wal-Mart are unwilling to talk about the amount they plan on investing, analysts say it is likely to be in the range of the $5.6 billion announced by Reliance Industries when it launched its push into the retail sector last month.
Princy Singh, a retail sector analyst at Citigroup said the venture will potentially be at a same scale as that of the large players like Reliance Industries and Pantaloon Retail, India's largest publicly traded retailer and the only one with a presence across the country. "Given the scale of expansion these retailers are planning, the fight for real estate and talent as well as a strong supply chain is likely to intensify. There will be an inflationary pressure on real estate prices and commercial rentals," said Singh.
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Since the Indian government does not permit foreign companies to own department stores, Bharti will come up with the capital for the venture. Wal-Mart's reputation for selling branded products at low prices is likely to help the venture as competition in the retail business intensifies and big-name brands vie to give consumers the best deals. India's retail sector is dominated by small neighborhood stores, but that is rapidly changing as the country's middle class grows and becomes increasingly urban.
The chain store sector is projected to grow at an annual rate of nearly 22 per cent in the next ten years, with annual sales reaching $55 billion. The overall retail market, by contrast, is likely to grow at a pace of 5.5 per cent.
Global retail leaders like Carrefour and Tesco may soon find other tie-ups in their attempt to enter India. Given the country's millions strong consumer base, for now it seems like there is room enough for several big players. At least that's what Reliance Industries' head Mukesh Ambani is saying. He told reporters Monday that India's retail sector had space for six to eight major competitors and would generate between 10 million and 15 million jobs in the next three years.
For Wal-Mart, success in India would represent a welcome victory after several international defeats. The company, the world's largest retailer, has been stymied in various markets, notably deciding to withdraw from Germany and South Korea earlier this year. It won a major victory in China, however, arranging last month to buy the 100-store Trust-Mart chain, beating out Carrefour, which had also been after the company.
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