Walmart in India: a long way to go

On Thursday night, they got their wish, as the country’s cabinet, in one of the most radical pro-liberalisation moves in years, decided to allow 51 per cent FDI in multi-brand retail (hello Walmart, Tesco and Carrefour), and 100 per cent in single-brand retail – opening the door for Ikea and others. So far so good. There are still other hurdles though. Walmart and Tesco each have a big local partner in Bharti and Tata’s Trent subsidiary, respectively, while both, and France’s Carrefour, also operate wholesale cash-and-carry stores in the country. These arrangements, analysts told beyondbrics, would make it easier for them to hit the ground running. Still, deals aren’t expected to be announced for at least a few quarters, and actual stores probably won’t be up and running for a couple of years as companies work to navigate the many obstacles to operating in India. “Basically for those players who are already present in India…these are the no-brainer deals that will happen in the future,” said Gautam Duggad, consumer analyst at Prabhudas Lilladher. “They start with an advantage by being in India for a long time now and understanding the market as much as they have.” The three big foreign companies all have store roll-out plans for their local brands, and could convert those to their flagship banners as retail stores. But even then, it will take time before they can be sure they are in full compliance with the policy. Indian retail stocks shot up on the news, with shares in Pantaloons, India’s largest retailer, up nearly 17 per cent on close, and shares in Shoppers Stop, Trent, Koutons Retail and Vishal Retail up around 6, 8, 10 and 20 per cent, respectively. It was a bold move for a government that has been crippled by corruption scandals and unable to enact meaningful economic reform. It could have opted to do nothing given its many economic challenges: a slowing Indian economy, inflation remaining persistently high, foreign financial investors divesting from India, the rupee faltering and the country’s trade deficit widening. But instead prime minister Manmohan Singh’s ruling Congress party moved on what some consider to be most significant reform since the 1991 budget that first liberalised India’s economy. But even as foreign giants go to work, they face a vast array of obstacles. They include: Infrastructure: Water cuts. Power cuts. Potholed roads. A non-existent cold supply chain. These are but a few of the immense infrastructural deficiencies foreign players will have to confront upon entering India. Those who are already in India have an advantage of knowing what they’re up against, but India’s roads network won’t get fixed, its water supply problems won’t be solved, its electricity grid won’t become reliable, and its cold chain won’t materialize overnight – which means we may be far from a Walmart in every city. Opposition: Both the civil society groups and opposition parties (and sometimes both at the same time). The Congress is currently facing an opposition whose protests have forced the early adjournment of the first three days of the winter session of parliament. Members of the Congress party’s coalition government – some of whom are opposed – could also cause problems. Opposition leaders have expressed, with an eye on key regional elections next year and federal elections in 2014, their vehement opposition to FDI in retail on the grounds that it will hurt India’s small grocers. It’s happened before. Reliance Industries, the country’s largest private sector company, was forced out of Uttar Pradesh in 2007 when it attempted to open a chain of supermarkets, beset by protests launched by some of India’s millions of mom-and-pop stores. If Reliance boss Mukesh Ambani can’t overcome opposition from traders, perhaps nobody can. Land acquisition: The Indian government canrelocate people for business when it wants. It has done so for everything from Formula 1 tracks to automotive plants – but ministers can be reluctant when they come up against local protests. For major foreign players to make huge investments, India will have to afford them a certain level of certainty – can the government do that given its track record? High real estate prices: Given that one of the restrictions on foreign supermarkets will be that they can only operate in cities of 1m people or more – limiting their footprint to between 36 and 55 cities, depending on the estimates – foreign players can expect to pay exorbitant prices for sub-prime real estate. Bureaucracy: India’s notorious red tape will prevent foreign firms to set up shop without restrictions, permissions, and permits of all sorts, including the approval, on a case-by-base basis, by the Foreign Investment Promotion Board. Corruption: In India, most real estate transactions involve some amount of black money, either in the deal itself – it isn’t uncommon to pay, say, half in cash and half by cheque – or separate bribes to local officials. Will foreign players be prepared to navigate India’s murky business environment? Indian consumers: The consumers Walmart and Tesco and Carrefour wish to tap may be not be keen to change their shopping habits. Despite concerns that big retailers will squeeze out mom-and-pop operators,  many middle class Indians like to phone their local grocer and ask for a single bottle of soda, or four onions, or three eggs, and have them delivered within 15 minutes by a man who knows their address simply by hearing their voice. In the end it may not be Walmart that makes it tough for the veg-wallah, but the veg-wallah that makes life hard for Walmart. Neil Munshi 25 Nov 2011 http://blogs.ft.com/beyond-brics/2011/11/25/walmart-in-india-a-long-way-to-go/#axzz1eycsET4k