The end of the six-year joint venture between Walmart and its Indian partner Sunil Mittal’s Bharti Enterprises suggests multinational retailers will have to take a new approach to India’s retail market. Forget about it, at least until after next year’s elections. The arrival of the world’s large-scale retailers into the temptingly large but hitherto protected Indian market has been held at bay despite the liberalizing efforts of prime minister Manmohan Singh’s government.
Trailblazer Walmart is retreating to wholesale, where there is no cap on the size of a stake a foreign firm can own in an Indian business. Walmart will buy out Bharti’s half of their Best Price Modern Wholesale cash and carry joint venture; 20 stores with, tellingly, no new ones opened this year. Its erstwhile partner will be left in full control of the retail business Easy Day (225 stores, but also no new openings this year).
The split has been carefully worked out by the companies over the past six months, but the question it raises is whether Walmart is making a tactical retreat from a partnership that wasn’t working out as hoped in the face of extensive red tape and political hostility around to multi-brand foreign investment in retail, or whether it is a sign of a deeper malaise in the confidence of international businesses in India, just when India needs to attract more foreign investment to reinvigorate its flagging economy.
Indian officials are scrambling to pass off the break-up as a partners’ problem, not a foreign direct investment issue. There were undoubted difficulties in the relationship, notably an anti-corruption drive initiated by Wal-Mart at the joint venture, a politically embarrassing flap over Wal-Mart’s lobbying in Washington to get the U.S. government to lean on India to give it greater access, and a controversial financial deal involving equity warrants in Bharti Retail’s parent company that prompted an official investigation into allegations that Wal-Mart had illegally circumvented India’s restrictions on foreign direct investment in multi-brand retail two-and-a-half years before the government actually lifted the ban on foreign investors in the sector last year.
Yet that investigation and a statement from the multinational points more to structural impediments that partnership problems. Walmart would, it said, “continue to grow the [wholesale] business while working with the government and interested stakeholders to create conditions that enable foreign direct investment in multi-brand retail.” Walmart’s Asia head, Scott Price, had put the point more bluntly when attending last weekend’s Asia-Pacific Economic Cooperation (APEC) forum in Bali. Walmart was not keen, he said, to invest in India, unless the multi-brand retail policy was made clear.
Among the points of obfuscation are stringent policy conditions such as mandatory 30% sourcing from Indian small- and medium-sized businesses, and a minimum investment of $100 million in greenfield facilities, of which 50% must go into building local infrastructure. Price said during the APEC meeting that it wasn’t possible for any foreign retailer to comply with these conditions, adding,”no domestic retailer is complying either.”
A year ago, the government raised the stake foreign companies could hold in Indian multi-brand retail to 51% in an unexpectedly revvial of long-delayed plans to open up the retail, aviation and broadcasting sectors to more foreign investment. While Indian airlines and broadcasters have attracted suitors, few have followed Wal-Mart into large-scale retail. The two other of the world’s largest retailers, the U.K’s Tesco and France’s Carrefour, have been noticeable by their absence. Both are said to be waiting for the ‘policy clarity’ that has so frustrated Walmart.
Both might look at Bharti as a potential partner — Bharti is predominantly a telecoms company, and so needs a partner with deep retail expertise. For its part Walmart will need to find another domestic partner if it is eventually to make good on its ambition to get into multi-brand retail. However, any matchmaking is unlikely now until at least after next year’s elections when it will become clearer if India’s economic reforms are to be speeded up or rolled back.