Setting Up Shop

Just because something is legal or legitimate, does not mean that is right. The best example of this is Wal-Mart’s backdoor entry into India by virtue of its JV with Bharti Retail. For those who believe that Wal-Mart is solely interested in wholesale retail are completely oblivious to the company’s expansionist tendencies across the world. Contrary to their statement in this article, Wal-Mart is in a JV and pursuing cash-and-carry out of compulsion not choice. If Indian FDI laws were more flexible, Wal-Mart would set its sights to conquer the surging Indian retail market same as it did in Mexico or Central America. 
Let’s not kid ourselves: Wal-Mart is doing wholesale in India because they have to. And really, they probably won’t be doing much business with kirana owners like they claim they will. As the director of India FDI Watch said: “Here Wal-Mart is coming as a wholesaler, and Wal-Mart is only selling to Bharti.” There is nothing in it for the small vendors or farmers.

Cash-and-carry: the Wal-Mart way [India Business Law Journal]

Like it or not, Wal-Mart is coming to India. But the retail giant won’t be setting up the air-conditioned, consumer friendly superstores visible in so many other countries. Instead, in order to comply with Indian laws, Wal-Mart is establishing with Bharti Enterprises a business-to-business wholesale retailing company called Bharti Wal-Mart. The venture is a 50-50 joint venture between the two companies, though Indian law would have allowed Wal-Mart 100% FDI in such a back-end business.

“It is a joint venture out of choice, not compulsion,” a Wal-Mart spokesman tells India Business Law Journal. “We recognize the importance of having a local partner based on our excellent experiences working with partners around the world in places like Mexico, Central America and China.”

“Bharti is a great company,” the spokesman continues, “with a strong understanding of the market in India, and makes for a winning partnership.”

Wal-Mart sees the potential for its wholesale cashand-carry business in India as immense, and is eyeing the country’s 12 million neighbourhood shops – 90% of which the company says are not directly served by fast moving consumer goods companies – as its customers.

“Our B2B wholesale cash-and-carry stores, which we are initially targeting to open in tier II and tier III cities, will offer a great way for kirana stores to get access to quality products at the prices they need,” explains the Wal-Mart spokesman. “In turn, they can pass on these benefits to their customers.”

There are many who believe, however, that Wal-Mart is less interested in wholesaling its goods to kirana shops and more focused on doing business with one particular retail chain: Bharti Retail. Mint reported on 17 April that Bharti Retail had quietly opened its first three grocery stores in Ludhiana, Punjab, speculating that the low-key opening might have been motivated by a desire to avoid protests. Bharti Retail has entered a franchise agreement with Wal-Mart, and will receive technical support from the American company – a relationship that some see as proof of Wal-Mart’s intention to focus on selling to Bharti rather than wholesaling to kirana shops.

“Here Wal-Mart is coming as a wholesaler, and Wal-Mart is only selling to Bharti. And Bharti is doing the retailing,” says Dharmendra Kumar, director of India FDI Watch, adding that he thinks Wal-Mart has found a backdoor into India’s retail market that, while compliant with the law, is perhaps incongruous with the law’s intent.

And yet, as the Wal-Mart spokesman correctly points out, “this is completely in line with what is permitted under existing guidelines.”

It’s a set-up some lawyers suspect may be adopted by other foreign retailers with an eye on India. “I think Carrefour is also looking at the same thing,” says Vineet Aneja at FoxMandal Little.

Carrefour would be retracing steps already taken by Metro AG of Germany and Shoprite Holdings of South Africa, which already have cash-and-carry operations of this nature in India.

It has become generally accepted, says one Indian lawyer, that this is the formula that works. “You have front-end retailing which was not open to the foreign party, and back-end retailing or wholesaling which was available. So you have to find inventive ways of getting structures that allow you to marry value between the two and ensure that the Indian partner does the frontend retailing.”

Some wonder if Wal-Mart and Bharti have a hidden deal that will provide for restructuring if and when FDI is allowed in multi-brand retail. But such speculation remains publicly unsubstantiated.

“It’s not traditional,” Aneja says, noting that wholesalers or distributors do not typically trade with a single retail partner on the front end. And yet, Aneja underlines that the “Wal-Mart example is completely legitimate. They’re doing the wholesale supplying and all the retail outlets are owned by Bharti.”

Ketan Kothari of Thakker & Thakker explains the scenario to foreign investors: There are three layers in this sector, manufacturing, distribution and front-end retail. “The first two layers are open for you,” he says. “And everybody who has functioned in these layers has survived in India.”

Posted by Research Team on Friday, May 16, 2008