Case Study Bharti Walmart JV

7/30/2019 Case Study Bharti Walmart JV

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Bharti Walmart JVCase Study for Groups Fore School of Management

Interling Theories of International Trade


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Bharti Walmart JVCase Study for Groups Fore School ofManagementGroup _________

Team

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Please Read the Case and Analyze and Write areport contextualizing the Porters DiamondFramework

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

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estate services company, CB Richard Ellis' findings state that India's retailmarket 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 ATKearney. 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 alreadyhas 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


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advantage of the three Press Notes that allow FDI up to 49 per cent inoperating-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 manufacturer and retailer, Gitanjali Group and MMTC are jointly

setting up a chain of exclusive retail outlets called ShuddiSampurna Vishwas.

The joint venture, which plans to open around 60 stores across India by end of

this year, will retail hallmarked gold and diamond jewellery.Mahindra Retail, a part of the US$ 6.7-billion Mahindra Group, plans to invest

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 comefrom 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

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information services and access to funding are also bringing prosperity torural 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 RetailSector 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 isforecasted 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


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end and retailers, and in turn, consumers on the other. The venture willsupport 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 range of fruits and vegetables, groceries and staples, stationery,

footwear, clothing, consumer durables and other general merchandise items.

Bharti Wal-Mart Private Limited will bring modern supply chain and back-endlogistics 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 millioncustomers 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

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combination. Wal-Mart's logistics skill and Bharti's execution capability willcreate 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$ 1.46billion. 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.

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 Wal-

Mart, 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.

Case Study Bharti Walmart JV

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