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Dec, 01 2006

WAL-MART OPTS FOR FRANCHISING IN INDIA

IN an otherwise fragmented Indian retail market, the last few years have witnessed an explosion in organised retail formats, comprising of supermarkets and hypermarkets. Therefore, in order to tap this growth opportunity,

IN an otherwise fragmented Indian retail market, the last few years have witnessed an explosion in organised retail formats, comprising of supermarkets and hypermarkets. Therefore, in order to tap this growth opportunity, Indian retail organisations need to be prepared for a quick scale-up across dimensions of people, processes and technology in addition to identifying the right formats and value propositions for the Indian consumer.

Hectic activity is observed in the sector in terms of expansion, entry of international brands and retailers as well as focus on technology, operations and processes. All these present a tremendous opportunity in this new high-growth industry. While the opportunities in Indian retail are immense, all players must be aware that the consumer culture, business practices and industry dynamics in India can differ substantially from what they are accustomed to at home, often leading to pitfalls for the unprepared.

The coming of Wal-Mart

In what would well be termed as a significant turning point in organised retailing and another step towards global retail franchising in India, Wal-Mart, the world's largest retailer, has opted to enter India through a tie-up with the Mittal family-owned company, Bharti Enterprises via the master franchise route. The venture into the domestic market by the $316-billion Wal-Mart Stores Inc, would lend to a dramatic twist in India's $250-billion retail story.

Though the Bharti group denied the development, however, according to sources and media reports, its chairman, Mr Sunil Mittal and a few key executives left for Europe with a Wal-Mart team on November 17, 2006, to what would be to finalise the details of the partnership. In all probability the deal is likely to be signed soon.

Bharti has been in discussions with Wal-Mart and the world's fourth largest retailer, Tesco Plc, UK, for several months now. Wal-Mart came back with a better return-on-investment proposal, sources said. Bharti and Wal-Mart have broadly tied up for a master franchise agreement since foreign direct investment (FDI) is not allowed in direct front-end Indian retail, other than in single-brand stores. According to the agreement, Bharti will use the Wal-Mart name for its retail stores.

According to sources, the foray will include all major formats like hypermarkets, supermarkets and grocery stores. The full format of the agreement and a detailed roll-out plans will be finalised by January 2007 and the execution will be in place a year from then.

The Bharti-Wal-Mart venture will initially invest $100 million, which will go up to $1.46 billion, according to media reports.

The Wal-Mart-Bharti combine will not own any real estate. Rather, the real estate will be owned by private equity funds, with Wal-Mart and Bharti paying lease rentals for the space as anchor tenants. The deal will give Wal-Mart access to Bharti's domestic network, while Bharti, in turn, will get access to Wal-Mart's overseas network. The company is also believed to have identified the cities it would like to move into. The company will open at least 10 stores in its first phase here. Anything less than that will not be viable for them.

In April, this year, Mr David Mulford, United States Ambassador to India, had met the Indian Prime Minister, the Finance Minister and the Commerce Minister purportedly at the behest of the US retailer. Sources say that Wal-Mart had been busily preparing reports on the Indian market and Indian retailers. Wal-Mart had held meetings with all the likely partners in the country. One of the names doing the rounds was Reliance and Mahindra & Mahindra.

Wal-Mart, of late, had also acquired the Indian government's approval to set up two offices in the country. The company has received all necessary approvals, including one from Reserve Bank of India. These two offices will be located at Mumbai and Delhi to analyze business opportunities in Indian retail sector.

These offices will increase sourcing activities in the country and study market potential where the company desires to source material worth $4 billion in the near future. Wal Mart has been sourcing goods from India since 2001, and has already sourced goods worth $1.5 billion. This is expected to rise to $10 billion over the next few years. Wal-Mart with $285 billion in revenues, has increased its sourcing out of India to $640 million in home wares, textiles, apparel and fine jewellery during this year.

After having waited for a number years for the doors to retailing to open through 100 per cent FDI, Wal-Mart has finally opted for the master franchising route, following the example set by a number of foreign brands, while initiating joint businesses in India. Franchising is the easiest and safest means of entering the country for business development.

Wal-Mart has been eyeing the huge India consumer market and had begun talks with a number of Indian firms seeking a strong partner for its retail venture in India.

The eagerness with which Wal-Mart opted to enter India is compounded with the fear that after its troubled start in China and Brazil, the retailer did not want to take any chances in India. However, despite the troubled start, it has set up 45 stores in China within the 10 years it has been there. That will make it larger than any other Indian discount store chain, because of larger shops and higher efficiency.

In India, Wal-Mart will also have a first mover advantage, though it does not consider this as a major benefit since it sees India as a vast potential with enough room for more chains of retailers.

While the government is still holdings its final version on FDI in retail, many global retailer do not want to loose the opportunity and would like to consider an alternative India entry. Though it may seen a back-door entry, but franchising is certainly the route they perceive, which experts believe, might be a better strategy considering the diversity and the political system in the country. Therefore, a local partner or a master franchisee might work to the advantage of India operations. As an important territory for expansion for most international retailers, India holds opportunity for not just the country but also the region and an important sourcing country.

Wal-Mart's franchise strategy

FDI restrictions in retailing has not deterred prominent international players from entering India and achieve breakthrough growth. The right market entry strategy can be devised for retailers based on their business models. India is now firmly placed on the UK and US radars as US retailers are gradually realising the potential of the retail and consumer goods sectors.

Wal-Mart, thus, not waiting for 100 per cent FDI to open, visualised franchising as an immediate and better opportunity in a market as large and diverse as India. This further indicates that global retailers are considering India as a big opportunity and ready to be flexible with the strategies they have adopted in other countries.

Is Bharti the right partner?

Bharti Entreprises has been seen as a front-runner in forging partnership for its retail venture. There has been information of Bharti in discussion with leading retailers including Tesco & Carrefour. While Tesco was seen as a possible partner considering the alliance in the Agri business, it has now advanced with Wal-Mart. Bharti Airtel Ltd, a part of Bharti Enterprises and India's leading provider of telecommunications services, has transformed the telecommunication story in India into one that is affordable and which offers a wide coverage area.

Bharti certainly is at an advantage considering the company's strategy and success in the past especially with international alliance and joint ventures. Here are some of the advantages that Bharti holds:

Proven track record with international partnership: Bharti has created a win-win proposition for its international partners, specially telecom, which would work for the company's future partnership forays.

Telecom experince: The company's success in telecom is working to its advantage, as retail is seen as a similar business model, in terms of operation, investment and roll out, besides the regulatory and political interference that telecom involves. Considering Bharti's telecom foray across country and the complexities of licences and back end mapping of the country, it has been very successful in its operations.

Three key hindrances

Retailing in India has three key hindrances. These can be listed under the following heads:

Real estate costs: The high cost of real estate today compared with the average purchase ticket size in India is still low. This could lead to a situation of high fixed costs, with low contribution per sale for retailers. High footfalls would be a necessary condition for success.

Distribution costs: The absence of distribution networks connecting tier-two towns with regional logistics hubs, has given scope for organised logistics players, like regional transport companies, or third party logistics (3PL) players to develop these distribution networks, including warehouses, cold chains and truck and multi-modal services connecting these locations. While Indian corporations are making investments in warehouses and hubs, outsourced logistics service providers are also emerging. McDonald's working with Radhakrishna Foodland is a case in point. However, sources confirm the Bharti will have a separate company to manage its supply chain and logistics which will be a wholly-owned subsidiary of Bharti Enterprises.

Regulatory aspects: Regulatory acts and licences can restrict rapid growth of retailing in India. Here, a strong local partner with experience in similar operation, like telecom, could well be considered over others. Bharti has been able to over come similar regulatory issues relating to centre and state governments, including foreign direct investment.

Global expertise local opportunity

Experiences of MNC retailers, when they enter new markets, would provide some insights on whether standard international format choices work everywhere. In India, too, it may be difficult to transplant a successful international format directly and expect similar performance. Local conditions and insights into the local buying behavior have to shape the format choice.

A good point to note in the retailing industry, today, is the level of experimentation happening locally in terms of formats. Players like Subhiksha and Margin Free Markets are providing convenience with discounts on goods, while internationally convenience formats typically charge a premium over market prices. Similarly, ITC is experimenting with a model which brings together a two-way flow of goods in the retail outlet: farmers sell their produce and purchase goods to fulfill their consumption needs.

While the experience of these retailers, as they scale up beyond their current geographies, may provide new insights and lead to modification or fundamental re-engineering of their formats in future, such experimentation and identification of an appropriate format for the local conditions would differentiate winners from losers in the Indian retail market of the future.

A strong local partner would work to the advantage to evolving a India-specific business model and also build India's understanding in the JV or master franchise operations. Wal-Mart being an international giant might want to operate singlehandedly once it has established itself in the country. This could probably lead to a buy-out in later stages.

However, as of today, the Bharti-Wal-Mart partnership is set to revolutionise the retailing sector in India, and promote franchising the way the two companies have opted for.

And, once Wal-Mart comes in, other retailers like Tesco and Carrefour are likely to step on the gas.

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