As Wal-Mart gears up for entry into the Indian retail market speculations are rife over its business structure and partnerships and its impact on the Indian consumer market. Previously, Indian policy on foreign investment in retail restricted multi-brand overseas chains to protect local retail players. This meant Wal-Mart could only operate as wholesalers in partnership with the domestic retailer, Bharti Mittal group. The partnership between Bharti and Wal-Mart spawned many retail outlets in India with the brand name Easyday. Now, with the relaxation of restrictions in retail FDI, Wal-Mart seems to be looking for a majority 51 percent stake in a joint venture. Raj Jain, President, Wal-Mart India, and also Managing Director, Bharti–Wal-Mart, the Cash & Carry Joint Venture, has called Bharti as Wal-Marts natural partner in India .But he also indicated that Wal-Mart is keeping its options open.
Bharti Mittal, meanwhile, has expressed hopes of being able to continue with the 50-50 partnership arrangement with Wal-Mart even in front-end retail. Mittal also stated that Wal-Mart is not in the habit of insisting on its brand name, and hopes to retain the already established Easyday brand name as well.
Wall marts entry into the Indian market has been marred by controversies. According to a CNBC TV 18 report Wal-Mart made investments in the Bharti Mittal group to manipulate and circumvent Indian policy norms. The allegation is that Cedar Support Services, (originally Bharti Retail Holdings) which was carrying out multi-brand retail business in India through a 100 per cent subsidiary Bharti Retail, amended its articles of association in December 2009 enabling it to provide services as a real estate consultant and allegedly facilitating Wal-Marts business interests in India. In March 2010, Wal-Mart Holdings invested 456 crore in Cedar Support Services. Then on 29 March, 2010, Cedar issued nearly 455 million zero per cent compulsorily convertible debentures with a face value of 10. These were convertible into nearly 426 million equity shares at a premium of 70 paise per share.
In effect, Wal-Mart Holdings invested 456 crore in a company that was a real estate consultant. But, Cedar then went ahead and allegedly invested the entire funds in its wholly owned subsidiary Bharti Retail, the company that has been engaged in the business of multi-brand retail. India permitted 51 per cent FDI in multi-brand retail only this September. Specific questions as to whether Bharti or Wal-Mart has at any point ever informed the RBI about this were not answered by the two companies as per the CNBC TV18 report. On July 11, 2012, public interest litigation was filed in the Delhi High Court calling on the court to investigate whether Wal-Mart was making an indirect entry into India’s retail sector through Bharti Enterprises. The court has served notices to the corporations and the government.
Wal-Mart is no stranger to legal complications. There have been allegations of predatory pricing and law suits filed in the U.S. There were cases filed against it for discrimination against its women workforce as well.
Another hurdle for Wal-Mart, the $447-billion retail giant, would be the government policy that gives the Indian states the right to decide where the foreign chains can set up shop. Also, only cities with a population of over a million are permitted to have these. Wal-Mart’s usual format of leviathan stores might prove difficult in such cities as they might not have large pieces of land to offer within the city limits. There are mixed feelings about the employment generation capabilities of Wal-Mart in India. It promises to lead to greater employment in the service industry and its success is likely to attract even more FDI to India.
On the other hand, as per a study published in Economic Development Quarterly, University of Illinois Chicago economics professor Joe Persky, one of the co- authors states “No matter which direction you go from Wal-Mart, there’s a very high rate of business closures in the immediate vicinity, and the further away you get there’s less and less.”
Raj Jain, President, Wal-Mart India in an effort to boost confidence has stated that Wal-Mart will look to sourcing mostly from local suppliers and work on arrangements to price 10-15 percent lower, while concentrating on products with high functionality as opposed to brand names. A supplier side concern could be fears of Wal-Mart monopoly in the retail sector leading to greater power over suppliers.
Wal-Mart is looking to cash in on the consumerist wave in India. The gullible middle class might just end up falling for the hugely discounted items and end up paying more in a bid to avail cost margins on relatively unnecessary items.