War for dominance: Wal-Mart takes retail war to back-end

Suppliers, kirana stores to feel the heat, realtors may hit the jackpot

MUMBAI/NEW DELHI: The war for dominance in the Indian retail industry has escalated multi-fold with the entry of Wal-Mart, the $ 312 billion (Rs 14 lakh crore) discount retailer, in alliance with telecom czar Sunil Mittal’s Bharti group. As foreign direct investment (FDI) is banned in multi-product retailing, the 50:50 Bharti-Wal-Mart agreement will focus on supply chain, logistics and wholesale business, leaving Mittal  to manage the customer-facing storefront.

In effect, the customer will see a Wal-Mart-like store carrying the Bharti name, but it will be powered by the global giant’s supply engine. In the process, it could shake up the entire modern-format retailing industry which has seen the entry of big names like Mukesh Ambani’s Reliance in recent times.

The logic of the alliance is simple: Mittal will bring the local market knowledge and political clout necessary to smoothen Wal-Mart’s entry while the latter’s supply chain prowess will help Bharti make up for a delayed entry in the business. Wal-Mart has been eager to enter India quickly following reverses in Germany and South Korea, where incumbents have been able to get the better of the US retailing giant.

In India, the Bharti-Wal-Mart combine will be up against Reliance Industries, India’s largest private sector company, and Pantaloon Retail, the country’s largest listed retailer, both of whom are planning multi-billion dollar investments. While Reliance plans to invest around Rs 25,000 crore and is targeting a Rs 90,000 crore annual turnover by 2010, Pantaloon plans to increase its stores to 4,000 by 2010. Reliance Retail opened its first 11 grocery stores in Hyderabad this month. Mittal told DNA Money that he was planning an all-India rollout by the second half of 2007.

The stakes are huge, for the organised retail industry is expected to explode from just around $ 4 billion now to $16 billion by 2015 - a 16-fold growth. Speaking after the Wal-Mart and Bharti deal was announced, Mukesh Ambani said: “No one company, no one multinational, can help India realise its true retail potential. There is place for six to eight players. The government should allow foreign direct investment in retail, otherwise foreign companies will find their way into the country anyhow. Look at my friend Sunil Mittal!” The reference was to Wal-Mart’s backdoor entry into the logistics and supply chain business instead of the front-end.

Front or back, Wal-Mart’s presence is widely expected to revolutionise all aspects of Indian retailing. With its “every day low prices” philosophy, the first to feel the pressure will be small kirana stores and consumer goods suppliers, who could be squeezed for margins.

“Wal-Mart has been highly efficient. Its entry will lead to competition in every part of the value chain, including sourcing, real estate and the whole gamut of the supply chain,” says Arvind K Singhal, chairman of retail consultancy firm Technopak.

Another areas of immediate impact will be real estate prices. According to realty consultants, rentals for retail space have gone up by 25-100 % depending on the location. And currently, on an average, it ranges between Rs 50-250 per sq ft per month.

In recent months, mall space has increased to 54 million sq ft from 2.2 million sq ft. According to Image Retail, the space is likely to rise further to 88 million square feet by the end of 2007.

In an interview to a TV channel, Sunil Mittal said his retail venture would both be “buying real estate as well as leasing it out. And the investment model will depend on the proportion of rental and the leased property.”

Apart from realtors, two other major beneficiaries of the retail revolution could be small and medium scale manufacturers who can provide cheap supplies, especially clothing and processed food products. As retailers cut out intermediaries in the food supply chain, farmers could also get better prices. Wastages in taking food from farm to fork could come down. Estimates of agricultural produce wastage now run to $11 billion, which is about 9.8% of the total agricultural component of GDP.

The arrival of Wal-Mart will spur more international players to enter Indian retail, with Britain’s Tesco and France’s Carrefour waiting in the wings.

According to industry sources, Carrefour had zeroed in on Dubai-based retail major Landmark for a partnership to enter the Indian market some three months back. But with no formal announcement about the deal coming forth, speculation is rife that Carrefour may be redrawing its India blueprint now that its biggest competitor Wal-Mart has taken the plunge.

Even Tesco, which walked away from a deal with Bharti on issues of backend partnership and royalty payment, has begun afresh a search for an Indian partner.

Indian retail, it seems, will never be the same again.

What is Wal-Mart?
Wal-Mart is the world’s largest retailer, with sales of $ 312 billion (about Rs 14 lakh crore), or about 40% of India’s GDP. Started by the late Sam Walton, the chain now runs 3,900 stores in the US and more the 2,700 in the rest of the world. Wal-Mart employs 1.8 million people in its worldwide operations.

The Wal-Mart philosophy
Wal-Mart’s basic philosophy, enunciated by founder Sam Walton (1918-1992) is “everyday low price.” The  profit principle is that the company will make more money by driving volumes instead of focusing on margins. In his autobiography, Walton said the secret of successful retailing was to give customers what they wanted.

Wal-Mart store formats
Wal-Mart operates through three segments - the main Wal-Mart stores, which include Supercenters, Discount Stores and Neighbourhood Markets, as well as Walmart.com; Sam’s Club, which includes warehouse membership clubs in the US as well as samsclub.com, and the international segment.

Secret of success
Wal-Mart’s retail leadership is rooted in its super-efficient supply chain. It uses IT to the hilt, including radio frequency chips to track consignments. Every time a customer buys, say, a Tide detergent, Wal-Mart’s data warehouse takes note and informs P&G about when it should replenish that store and with how much detergent.

Why it’s controversial
Wal-Mart has been accused of paying its female shop workers less than the men in the US. It has also been accused of squeezing its suppliers so hard that they end up paying their workers a pittance. A 2004 report said the ratio of pay between the Wal-Mart CEO and his Chinese and Bangladeshi suppliers’ workers was 50,000:1.