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 10, 2013, 11:46 a.m. ET

Wal-Mart’s Other Path to Indian Consumers

ABHEEK BHATTACHARYA

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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
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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