Wal-Mart walks in

The "back-door entry" of the world's biggest retailer sparks fears of destruction of the livelihoods of millions who eke out a living from retailing.

ENDING months of speculation, Wal-Mart, the international retailing behemoth, has announced its entry into India. It is riding piggyback on a joint venture with the Bharti Group, which until now has a presence mainly in the telecom business. The alliance provides a "back-door entry" to Wal-Mart, say its critics. They allege that the joint venture cocks a snook at the government, which maintains that there is no change in its policy of not allowing Foreign Direct Investment (FDI) in retailing. The move comes after pressure on the government from lobbies favouring the entry of foreign players in the retail sector. Pressure from the Left parties has prevented the government from allowing this.

However, foreign retailers are taking advantage of loopholes in the policy, in particular the decision to allow FDI in single-brand and wholesale trade business (also referred to as cash-and-carry) to enter the Indian market. Bharti's alliance with Wal-Mart is merely the first such joint venture, which will enable global retailers to engage in full-scale retailing.

The present policy restricts FDI in retail to single-brand ventures, with a foreign shareholding cap of 51 per cent. However, 100 per cent FDI is permitted in wholesale cash-and-carry, where one can only sell to retailers and distributors and not to consumers. Besides, 100 per cent FDI is also allowed under the automatic route in warehousing services and refrigeration of agricultural products. Therefore, from a regulation point of view, Wal-Mart can hold a majority stake in the cash-and-carry venture.

Sunil Mittal clarified that the agreement with Wal-Mart stipulates that in the event of a dilution of stake at a later date, both partners will relinquish their share equally so that they remain equal partners. Although Bharti has not disclosed the precise details of the agreement, the venture is significant because it is the first time a big foreign retailer has used an obvious loophole in the policy regime. More such ventures can be expected in the days ahead. Foreign retailers are banking on the policy being revised later, after they have gathered critical mass in the market. In the telecom and insurance sectors, foreign players initially took a minority stake in Indian companies. But they are now demanding relaxation of the FDI norms. Wal-Mart and other global retailers appear to be adopting the same strategy in the retail trade business.

The "equal" joint venture between Bharti and Wal-Mart is likely to run the supply chain, apparently to sell to bulk buyers. In fact, Metro AG, the German retailer, is already doing this in Bangalore and is to begin operations in West Bengal shortly. It is likely that Bharti will, nominally, run the front end of the business, that is, the actual retail outlets. The back end, particularly the supply-chain logistics to feed the outlets, will be provided by the joint venture. In theory, the joint venture will be a cash-and-carry operation, which will supply goods in bulk to wholesalers, hotels and large establishments. However, the joint venture may end up providing preferential access to Bharti's own front-end stores.

In fact, Sunil Mittal, chairman of the Bharti Group, has argued that his joint venture is only going to do what others are already doing. "Metro has started their operations in India, and I understand they are about to start operating in West Bengal shortly. So, Wal-Mart should also be allowed to carry out cash-and-carry business," he said in Kolkata soon after the two companies signed a memorandum of understanding (MoU). Mittal said the venture would use "best practices for the satisfaction of the customer". He also promised "low prices every day", an obvious reference to Wal-Mart's well-known credo, "Always low prices". It is not clear yet whether the front-end stores of the venture will carry the Wal-Mart brand.

Wal-Mart has been eager to get a foothold in the Indian market, reckoned to be one of the fastest growing retail markets in the developing world. Soon after he returned from a visit to India in May 2005, John B. Menzzer, Wal-Mart International president and chief executive officer (CEO), said regulatory hurdles were a deterrent to the company's plans in India. Significantly, he remarked that his meetings with government officials had resulted in the company having "energised the FDI lobby and pre-empted the anti-FDI lobby in India". He said Wal-Mart could not afford to "wait endlessly". In fact, he said a joint venture with an Indian partner was on the cards so that the company could "take advantage of this market while it is still developing".

Indeed, so hot has been the buzz in the business press that wild guesswork passes off for "estimates" of the size of the Indian retailing sector. Crisil, a well-known rating agency, estimates the size of the retailing sector at Rs.10 trillion (one lakh crore rupees) in 2006, accounting for about one-third of the country's national income. Crisil says that about 70 per cent of this is concentrated in food and grocery products such as milk, grains, unprocessed vegetables and fruits and fast-moving consumer goods (FMCG), which are mainly items such as soaps and detergents. Crisil estimates that the penetration of organised retail in this segment is only 1 per cent of the total trade in the segment. AC Nielsen estimates the size of the Indian retail market at about $250 billion. It estimates that only 11 per cent of the sales in 23 major Indian cities is by "modern" stores.

Organised retailing rests on the logic of taking control of the supply chain. Those lobbying for a liberal retailing regime usually couch their arguments on the laudable objective of eliminating "middlemen", which will mean not only better realisation by farmers but also lower prices for consumers. In fact, this has been the classic argument Wal-Mart put forward to the criticism about its negative impact on wages and suppliers and on employment.

The retail trade, about 96 per cent of which is by unorganised retailers, contributes 10-11 per cent of India's gross domestic product (GDP). It is estimated that there are four crore Indians working in 12 million retail outlets. About 95 per cent of these outlets are less than 500 square feet (45 sq metres) in area. Although large-format stores are still small in number, their number has increased sharply in recent years. Indeed, this segment appears to have captured a large slice of the retail trade as a whole.

Most of the small retail units are neighbourhood kirana stores, pavement shops and pushcarts in urban, semi-urban and rural markets. These are typically small units - to call them enterprises appears incongruous - based essentially on family labour. Economic studies of the "informal" sector show that most of these units operate on a shoestring budget, satisfying specific needs of communities in their own localities. To put it in the language of the business press, they "offer value to consumers" by satisfying a felt need. For instance, they offer goods on credit to working-class folk who would be deemed to be unworthy of credit if defined by the usual commercial yardsticks. Obviously, "Always low prices" is not everything in this situation.

A back-of-the envelope calculation is enough to reveal the extent of employment losses resulting from Wal-Mart's entry into India. Current annual retail sales per employee is about Rs.78,000. In contrast, each of Wal-Mart's 3.3 lakh employees accounts for average sales of about Rs.74.18 lakhs. The fact that Wal-Mart's turnover per employee is about 95 times that of an average Indian worker in the retail business gives an indication of what to expect from Wal-Mart in terms of employment.

The entry of organised retailing is bound to create a shock. In fact, this is already happening in urban markets, where organised retailing has had an impact in the last few years. Lower prices offered by large retailers will obviously affect the operations of micro units. More significantly, since the logic of scaling up operations is dependent on retailers taking charge of the supply chain, their entry is likely to disrupt seriously - or even destroy completely - the existing supply chain.

It might appear that the entry of all big retailers - it does not matter whether it is Wal-Mart or Reliance - has the same consequences for smaller retailers. However, there is one crucial difference. While foreign retailers will pit Indian producers (in agriculture, manufacturing and in the services sector) directly against foreign producers because they operate with a truly global supply chain, Indian retailers will not expose them directly to pressures from the global market. Although this is only a thin line - which could possibly disappear in a liberal regime - it remains relevant.

According to reports, soon after the announcement of the Bharti-Wal-Mart tie-up, Reliance Industries Limited (RIL) chairman Mukesh Ambani met Union Commerce Minister Kamal Nath to plead for a level playing field for Indian retailers. Apparently, he was worried about the possibility of cheap imports from China flooding India.

Ambani had reason to be concerned about the adverse effects of Wal-Mart's entry. The announcement of the joint venture came soon after RIL made its retail foray with 11 "western-style" Reliance Retail supermarkets in Hyderabad, which is regarded as the fastest growing retail market. In fact, some of India's biggest corporate groups - among them the Tatas, the A.V. Birla group and the Munjals - have announced their entry into the retail sector. Clearly, businesses see new opportunities for profit, resulting in the replacement of the small by the big, in the retailing trade.

Reliance Retail plans to invest $5.6 billion (Rs.25,200 crores) in opening 4,000 stores in 1,500 towns across India. Significantly, the group also controls two Special Economic Zones (SEZs) near the most significant Indian market, Mumbai.

Reports indicate that warehouses to feed the retail outlets will be located in the SEZs. Reliance has already established a significant presence in the lower end of the supply chain by entering the food procurement business, particularly in Punjab and Madhya Pradesh. In fact, it procured significant quantities of grain after the last wheat harvest in Punjab, even as the state procurement agencies stayed away, resulting in the government's controversial decision to import wheat this year.

Big business houses such as the A.V. Birla group, ITC and the Tatas see opportunities in entering the retail sector. ITC, for instance, plans to expand its fruit and vegetable distribution network by opening 54 new outlets in select metros in the next three years. This appears to be a logical extension of its existing procurement business through which the company buys fruits, vegetables and grains directly from farmers.

The Bharti group is also positioning itself as a player in the agribusiness sector. It has acquired 5,000 acres (2,000 hectares) in Punjab to carry out export-oriented contract farming. It is also planning a foray into horticulture in West Bengal.

In the telecom business, Bharti and Reliance Infocomm (now a part of the Anil Ambani Group) are arch-rivals. When Reliance launched its telecom service, it was accused of circumventing telecom regulations by offering full-scale mobile services even though it held only a limited mobility licence. Reliance was accused of not only violating regulations but also ensuring that the regulations were "rectified" to legitimise its violations. Bharti was a fierce critic of the manner in which Reliance used to its advantage the "grey areas" in the regulations. Clearly, the boot is now on the other foot.

It would, however, be a mistake to reduce the issue to a slugfest between two corporate entities because far more is at stake for millions of people depending on retailing for their livelihoods.