Bharti Walmart JV

Case Study for Groups Fore School of Management

Interling Theories of International Trade

Bharti Walmart JV
Case Study for Groups Fore School of ManagementGroup _________
Team Bha 1.___________________ rti Wal 2.___________________ mar 3.___________________ t JV 4.___________________ 5.___________________ 6.___________________ 7.___________________ 8.___________________ 9.___________________ 10.__________________

Please Read the Case and Analyze and Write a report contextualizing the Porters Diamond Framework

The Indian retail market, which is the fifth largest retail destination globally, has been ranked the second most attractive emerging market for investment after Vietnam in the retail sector by AT Kearney's seventh annual Global Retail Development Index (GRDI), in 2008. The share of retail trade in the country's gross domestic product (GDP) was between 810 per cent in 2007. It is currently around 12 per cent, and is likely to reach 22 per cent by 2010. A McKinsey report 'The rise of Indian Consumer Market', estimates that the Indian consumer market is likely to grow four times by 2025. Commercial real

estate services company, CB Richard Ellis' findings state that India's retail market is currently valued at US$ 511 billion. ( Source : Mckinsey Report 2005) Banks, capital goods, engineering, fast moving consumer goods (FMCG), software services, oil marketing, power, two-wheelers and telecom companies are leading the sales and profit growth of India Inc in the fourth quarter of 2008-09. India continues to be among the most attractive countries for global retailers. At US$ 511 billion in 2008, its retail market is larger than ever and drawing both global and local retailers. Foreign direct investment (FDI) inflows as on January 2009, in single-brand retail trading, stood at approx. US$ 25.18 million, according to the Department of Industrial Policy and Promotion (DIPP). India's overall retail sector is expected to rise to US$ 833 billion by 2013 and to US$ 1.3 trillion by 2018, at a compound annual growth rate (CAGR) of 10 per cent. As a democratic country with high growth rates, consumer spending has risen sharply as the youth population (more than 33 percent of the country is below the age of 15) has seen a significant increase in its disposable income. Consumer spending rose an impressive 75 per cent in the past four years alone. Also, organised retail, which accounts for almost 5 per cent of the market, is expected to grow at a CAGR of 40 per cent from US$ 20 billion in 2007 to US$ 107 billion by 2013. India has emerged the third most attractive market destination for apparel retailers, according to a new study by global management consulting firm AT Kearney. It further says that in India, apparel is the second largest retail category, representing 10 per cent of the US$ 37 billion retail market. It is expected to grow 12-15 per cent per year. Apparel, along with food and grocery, will lead the organised retailing in India. India has one of the largest numbers of retail outlets in the world. A report by Images Retail estimates the number of operational malls to grow more than two-fold, to cross 412, with 205 million square feet by 2010, and a further 715 malls to be added by 2015, with major retail developments even in tier-II and tier-III cities in India. Marks & Spencer Reliance India is planning to open 35 more stores over the next five years, according to Mark Ashman, CEO of the company. The 51:49 joint venture between UKs Marks and Spencer and Reliance Retail Ltd already has 15 stores in India. Future Group has been restructured to test the new rules on FDI under Press Notes 2, 3 and 4 issued in February 2009. The company plans to bring in up to US$ 148.7 million in foreign investment. Although FDI is permitted only in single-brand retail and not permitted in multi-brand retail businesses like Future Group's, the conglomerate has created two layers of operations to take

Bha rti Wal mar t JV

advantage of the three Press Notes that allow FDI up to 49 per cent in operating-cum-investment companies as long as they are owned and controlled by Indians. Carrefour SA, Europes largest retailer, may start wholesale operations in India by 2010 and plans to set up its first cash-and-carry outlet in the National Capital Region. Currently, Carrefour exports goods worth US$ 170 million from India to Europe, UAE, Indonesia, Europe, Thailand, Singapore and Malaysia. Jewellery Bha manufacturer and retailer, Gitanjali Group and MMTC are jointly setting up a chain of exclusive retail outlets called ShuddiSampurna Vishwas. rti The joint Wal venture, which plans to open around 60 stores across India by end of this year, mar will retail hallmarked gold and diamond jewellery. t JV Retail, a part of the US$ 6.7-billion Mahindra Group, plans to invest Mahindra US$ 19.8 million by 2010 to step up its specialty retail concept 'Mom and Me'. Policy Initiatives The $428 Bn retail sector in India has received a shot in the arm by the Indian Governments recent policy decision to allow Foreign Direct Investment (FDI) of upto 51% in multibrand retail and upto 100% in single brand retail. Given that 95% of the sector constitutes unorganized retail consisting largely of mom and pop stores, the Government has treaded cautiously by building adequate safeguards for the domestic stakeholders in the unorganized sector. Foreign investments in retail will have to go through Government approval first. The policy mandates a minimum investment of $100 Mn with at least half the amount be invested in back-end infrastructure, including cold chains, refrigeration, transportation, storage, packaging etc. Further, foreign retailers will have to source a minimum 30% from the Indian small and micro industry. Another key policy initiative to safeguard small/unorganized sector retailers is that FDI is being allowed only in 53 cities having a population of over 1Mn out of nearly 8000 cities/towns in India. Finally in Indias federal structure, retail trade is a state level regulation and it will be upto the states to allow foreign participation in the respective 53 cities within their states According to industry experts, the next phase of growth is expected to come from rural markets, with rural India accounting for almost half of the domestic retail market, valued over US$ 300 billion. Rural India is set to witness an economic boom, with per capita income having grown by 50 per cent over the last 10 years, mainly on account of rising commodity prices and improved productivity. According to retail and consumer products division, E&Y India, basic infrastructure, generation of employment guarantee schemes, better

information services and access to funding are also bringing prosperity to rural households. The rural market, product design will need to go beyond ideas like smaller sizes (such as single use sachets) to create genuinely new products, according to Ramesh Srinivas, national industry director (consumer markets), KPMG India. According to the Investment commission of India, the overall retail market is expected to grow from US$ 262 billion to about US$ 1065 billion by 2016, with organised retail at US$ 165 billion (approximately 15.5 per cent of total retail sales). India is expected to be among the top 5 retail markets in the world in 10 years. According to new market research report by RNCOS titled, "Booming Retail Sector in India", organised retail market in India is expected to reach US$ 50 billion by 2011. Number of shopping malls is expected to increase at a CAGR of more than 18.9 per cent from 2007 to 2015. Rural market is projected to dominate the retail industry landscape in India by 2012 with total market share of above 50 per cent. Organised retailing of mobile handset and accessories is expected to reach close to US$ 990 million by 2010. Driven by the expanding retail market, third party logistic market is forecasted to reach US$ 20 billion by 2011. Bharti Wal-Mart Private Limited, a joint venture for wholesale cash-and-carry and back-end supply chain management operations in India, in line with Government of India guidelines. Under the agreement, Bharti and Wal-Mart will hold a 50:50 stake in Bharti Wal-Mart Private Limited. ( Source http://www.bharti.com/ourcompanies.html) Wholesale cash-and-carry operations provide small retailers and business owners a wide range of quality products at competitive wholesale prices that help them enhance their businesses and profitability. The Bharti Wal-Mart business-to-business (B2B) wholesale cash-and-carry joint venture will serve kirana stores, fruit and vegetable resellers, restaurants and other business owners. It also will serve other retailers such as Bharti Retail, which is setting up a chain of stores in India that are 100 percent owned and operated by Bharti. The wholesale cash-and-carry venture will invest in setting up an efficient supply chain. This will link farmers and small manufacturers directly to retailers, thereby maximizing value for farmers and manufacturers on the one

Bha rti Wal mar t JV

end and retailers, and in turn, consumers on the other. The venture will support farmers and small manufacturers who have limited infrastructure and distribution strength, and the supply chain will enable minimum wastage, particularly of fresh foods and vegetables. The first wholesale cash-and-carry facility is targeted to open by the end of next year. Over the next seven years, the venture is expected to open 10 to 15 wholesale cash-and-carry facilities and employ approximately 5,000. A typical facility will stand between 50,000 and 100,000 square feet and sell a wide Bha range of fruits and vegetables, groceries and staples, stationery, rti clothing, consumer durables and other general merchandise items. footwear, Wal Bharti Wal-Mart Private Limited will bring modern supply chain and back-end mar logistics t JV expertise to India, bringing Wal-Marts global best practices in such areas as just-in-time inventory, retail information systems, cold chain infrastructure, GPS for truck and trailer tracking, and fuel management systems. In addition, Bharti Enterprises 100% subsidiary Bharti Retail, that will own and manage the retail stores, has entered into a franchise agreement with Wal-Mart which will provide technical support to Bharti Retail Bharti Enterprises is one of Indias leading business groups with interests in telecom, agribusiness, insurance and retail. Bharti has been a pioneering force in the telecom sector with many firsts and innovations to its credit. Bharti Airtel Limited, a group company, is one of Indias leading private sector providers of telecommunications services with an aggregate of 44.67 million customers as of end of June 2007 spanning mobile, fixed line, broadband and enterprise services. Bharti Airtel was recently ranked amongst the best performing companies in the world in the BusinessWeek IT 100 list 2007. Bharti Teletech is the countrys largest manufacturer and exporter of telephone terminals. Wal-Mart Stores, Inc. operates Wal-Mart discount stores, Supercenters, Neighborhood Markets and Sams Club locations in the United States. The Company operates in Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico and the United Kingdom. Many analysts opined that both the parties in the venture had their own strengths and would complement each other. Viswanathan Vasudevan, an equity analyst at the Singapore-based Aquarius Investment Advisors Pte, said, "It's a great fit for Wal-Mart as Bharti knows the rules of the game and will save Wal-Mart a lot of time and energy to overcome the system. For Bharti, you can't get a better partner than Wal-Mart in retail." Gajendra Nagpal, director, Unicorn Investments, said, "This joint venture is a winning

combination. Wal-Mart's logistics skill and Bharti's execution capability will create a potent force in the Indian market." This franchise strategy with Bharti was a deviation from Wal-Mart's usual way of entering countries. This was because the policy restrictions on foreign direct investment (FDI) in the Indian retail sector. As part of the agreement, Bharti was expected to pay a royalty between 2 percent and 3 percent of sales to Wal-Mart for using the latter's brand name. The Bharti-Wal-Mart joint venture was expected to open its stores in India from August 2007. Though the parties did not disclose the financials of the deal, according to retail industry sources, the Bharti-Wal-Mart venture would make an initial investment of US$ 100 million, which could further increase to US$ 1.46 billion. Wal-Mart had reportedly brought in two veteran executives, Andy Guttery and Lance Rettig, to implement its operations in India under the joint venture. Wal-Mart had also roped in Raj Jain, Emerging markets president & CEO, Wal-Mart, to head the cash-and-carry business in India.

Bha rti Wal mar t JV

The retail industry in India is estimated at about US$ 300 billion and is expected to grow to US$ 427 billion in 2010 and US$ 637 billion in 2015. Moreover, only 3 percent of the Indian retail industry was in the organized sector. Foreign retailers were keen to enter India's rapidly growing retail market. However, the government had permitted retailers of single brand products to own a majority stake in a joint venture with a local partner (with prior government permission). Retailers of multi-brands were only permitted to operate through franchises and licencees, or a cash-and-carry wholesale model. The biggest competitor for Bharti-Wal-Mart is expected to be Reliance Retail, the retail wing of Reliance, which had planned to establish 10,000 stores by 2010. It had already opened 11 pilot stores under the "Reliance Fresh" format in Hyderabad. A few other Indian retailers felt that the entry of foreign retail giants like WalMart, Carrefour SA and Tesco Plc (Tesco) would result in Indian retailers learning some of the best international practices in retailing. However, analysts noted that the success of the joint venture would depend on how successful Wal-Mart is in building a cost efficient supply chain and sourcing network so that the cost savings are passed on the end consumer through its trademark "every day low price" strategy.