Bharti, Wal-Mart deal: A promising partnership
The Bharti-Wal-Mart deal promises to be the beginning of a fruitful partnership. The deal marks the Bharti group’s entry into the retailing industry, at a time when several big players such as Reliance, which is already in the fray, and Aditya Birla Group set to enter. While these two have group companies to help bankroll their retail ventures, Bharti, however, may not have as much of this leverage to bank on. This, along with its relative inexperience could be a reason why it chose to enter the industry through a tie-up with a foreign retailer, rather than go it alone. A partner like Wal-Mart would certainly give Reliance, which is now ahead in the game, a run for its money.
Significant for Wal-Mart
But the deal is probably just as significant for Wal-Mart, if not more. India, with its strong consumption story, is likely to play an important role in Wal-Mart’s international operations. Wal-Mart International, at $60 billion, contributes 20 per cent of Wal-Mart’s overall revenues and is its fastest growing division. But its forays into international markets have met with mixed results. Earlier this year, Wal-Mart exited from South Korea, as the retailer’s big-box formats failed to make an impact on customers. It also exited from Germany where it faced intense competition. The exits were, however, seen by analysts as an opportunity for the retailer to focus on high-growth markets such as China and India. Partnering with Bharti would help Wal-Mart reach out to Indian customers and understand their buying habits, considering that Bharti has successfully built up a strong franchise through its mobile subscriber base.
Wal-Mart’s franchise agreement with Bharti is a departure from its usual practice of entering countries through the acquisition route. The only other time it has used a franchise was with Indonesia in the mid-nineties. It made an exit two years later as FDI rules were yet to be relaxed and Indonesia was going through a turbulent political phase. Its decision to enter India through the franchise route reflects its eagerness to capture a share of the market when it is at a nascent stage – organised retail now penetrates a mere 3 per cent of the market. Wal-Mart has time to get its logistics and supply chain in order before the industry opens up to foreign investment. It would be interesting to see if the agreement provides scope for Wal-Mart to pick up an equity stake in the franchise operation once FDI is allowed.
In the meantime, the franchise agreement could fast-track Wal-Mart’s expansion in the country. Wal-Mart’s penetration in China has been slow – it has opened only about 70 stores in the last ten years – as restrictions on cities in which foreign retailers could open stores were relaxed only last year. Wal-Mart would be free to expand both in small towns and big cities in India.
If curiosity does not succeed in drawing customers to a Wal-Mart store, the promise of every-day low prices will. But as Wal-Mart has learnt from its experiences in Korea and Japan, fine-tuning its practices to suit local tastes will be key.
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