Wal-Mart’s Other Path to Indian Consumers; Wal-Mart’s decision to shelve its retail ambitions in India doesn’t mean it can’t tap into that country’s burgeoning consumer market
October 11, 2013 Leave a comment
October 10, 2013, 11:46 a.m. ET
Wal-Mart’s Other Path to Indian Consumers
Wal-Mart Stores‘ WMT +2.45% problems in India have so far been a byword for the emerging economy’s perils. But to some extent, its latest move in India suggests one area of promise. The world’s largest retailer by sales became Indian politicians’ favorite punching bag two years ago, when New Delhi decided to keep foreign retailers away to protect mom-and-pop stores. Even after foreigners were let into this sector last year, the government imposed protectionist restrictions on sourcing goods.So Wal-Mart limited itself to a 50-50 joint venture with India’s Bharti group to run wholesale stores, where foreign investment was allowed, probably with the idea of expanding into retail. Yet the rules on sourcing, which Wal-Mart has openly criticized, are now an obstacle for that expansion—and Wal-Mart still hasn’t opened a retail outlet. On Wednesday, the company said it would buy out Bharti to own 100% of this wholesale business.
Certainly, Wal-Mart’s experience shows the frustrations of the Indian retail sector. Yet there may be rewards from sticking around in wholesale.
The prospects for India’s retail sector were never that great, and not only because of politics. In big cities, supermarkets have to pay roughly 25% of their gross profit for rental costs, double international levels, says Abhishek Ranganathan at PhillipCapital. These prices are so high partly because of land-use laws that restrict supply, as well as poor property rights that make the market illiquid.
In contrast, wholesalers have it better. They avoid high property costs because they locate their warehouses outside big cities, says Arvind Singhal at Technopak Advisors. What’s more, red tape doesn’t interfere as much. Foreigners can own 100% of wholesale businesses, plus there are no diktats on sourcing goods.
Most importantly, wholesalers benefit from the one constituency that’s politically hurting retailers: mom-and-pop stores. Wholesalers sell mostly to these small businesses, and that’s in turn where most consumers go. In India’s fragmented retail sector, about 15 million small outlets account for 92% of sales, says Mr. Singhal.
Besides Wal-Mart, Metro Cash and Carry is a beneficiary of this trend. The German chain has been expanding its wholesale stores in India.
Investors need to wait for progress in Indian retail. But there’s more than one way to play the long-term Indian consumer story.
About bambooinnovator
Bamboo Innovator 