Bharti Wal-Mart Pvt. today (May 31, 09) opened the cash-and-carry store in the northern city of Amritsar. This week, the two companies finalized a 50-50 joint venture to go into the business-to-business, cash-and-carry wholesaling sector. The venture plans to open 10 or 15 wholesale outlets and employ 5,000 people during the next three years.
For a retailer of Walmart’s size with a turnover $285 billion, future growth can come only from new markets. The size of India’s retail trade is estimated at $206 billion and growing at five per cent annually, according to KSA Technopak, a retail advisory which closely tracks the trade.
It is not exactly something to be sneezed at. Large retailers like Dairy Farm International of Hong Kong and Metro Cash and Carry GmbH of Germany that have tied up with the RPG group and Metro Cash and Carry India Pvt Ltd respectively, have raked in considerable profits. The JV now styled under the brand name Spencer, already has sales at more than $100 million. Dairy Farm operates 45 stores under the Food World brand name.
The Indian retail scenario is booming and Indian retailers are doing well across the board. Current profits in the organised retail trade are good and the future seems even more alluring. The average urban consumer is saving less today than he did a few years ago and importantly, spending his income on a wider array of goods than earlier. The current mood of the market is expansionist with consumers willing to lap up newer and better brands. By 2012, organized retailers are projected to account for 16% of the retail market, up from 4% today.
Worldwide, the whole Wal-Mart business revolves around running a very efficient supply chain, saving in every aspect of that supply chain. It’s not just about negotiating better prices with the suppliers; it is actually about working with suppliers to remove inefficiencies in the supply chain.
However, the biggest problem facing Indian retailers and consumers is a dysfunctional supply chain. Because the market is highly fragmented — about 96% of the retail marketplace consists of small shopkeepers — economies of scale are elusive and both producers and retailers depend on long chains of middlemen to bring goods to market.
The typical Indian consumer pays five times the amount the farmer actually receives. In the U.S., the ratio is closer to 2-to-1. Also, about 60% of the value of India’s agricultural output is lost between farm and market, due to processing delays and “wear and tear”. To haul a load over 1000 miles, it takes about 4 – 5 days for a trucker in India, while the same is done in 20 hours in the U.S currently!
Also, India is a price sensitive market and therefore WalMart has to devise its strategy very carefully. Retailing is like a game of three dimensional chess where WalMart operates as a local, regional and global player. So depending on the needs of the market they would have to change the format and adapt.
Walmart International, sourced approximately $1.2 billion worth of merchandise from India last year and are aiming to increase that by almost 30 per cent every year, thereby doubling the sourcing in the next three years. Products that are sourced include apparel, fine jewellery, home textiles and houseware. Known for the strict quality standards, and tight price levels it enforces, Walmart nonetheless has suppliers eager to supply merchandise to it. Some of Walmart’s suppliers are already enhancing their production facilities in anticipation of growing business.
If all goes as per plan, in the next 5 years WalMart should have several cash-and-carry operations in the important geographies in India, if not across the country. Also some valuable lessons would have been learnt!
