January 18, 2006

Wal-Mart Trains Sights On India's Retail Market

U.S. Chain Lobbies
For Chance to Sell
To Huge Population
By ERIC BELLMAN in Mumbai and KRIS HUDSON in Dallas
January 18, 2006; Page A9

Wal-Mart Stores Inc. is knocking at the door of India, whose billion-person economy is largely untouched by modern retailing but might soon let foreign competitors into the sector.

India's prime minister and finance minister recently suggested that movement toward opening the country's retail markets would begin over the next six months. And while initial measures might not make room for the biggest retailers, any opening would be an auspicious sign for the big chain stores. Meanwhile, Wal-Mart and others in its niche -- which are increasingly hungry for international sales -- have been laying groundwork by building relationships with suppliers and distributors and wooing politicians and consumers. Last month, the U.S. company applied for government approval to open its first liaison office in India, which would permit it "to engage in undertaking research and business development activities."

The subcontinent's massive middle class is shopping like never before as its aspirations and purchasing power swell with the country's economy. But the world's biggest retailer has been locked out because of strict government barriers to foreigners owning retail businesses. That could start to change soon, officials and analysts say.

According to estimates by McKinsey & Co., India's $250 billion retail business is the world's eighth-largest. The consultancy firm, in estimates many analysts consider conservative, says the country's retail sector will expand more than 7% a year for the next five years.

The real attraction of India is its retail inefficiency. More than 95% of retail sales in India are made through 12 million mom-and-pop shops, newspaper stalls and tea stands. Sales by modern retailers in branded, professionally managed chain stores are expected to climb more than 15% a year during the next decade.

"Many smart people -- much smarter than I -- believe that India could be the next China," said John Menzer, vice chairman of Wal-Mart's U.S. stores and former head of international operations. "So, certainly, as a retailer, it's a place where we'd like to be."

The developing world is becoming increasingly important for big international retailers as competition slows growth in developed markets. Wal-Mart has struggled in some affluent countries, facing difficulty righting an acquired operation in Japan, stiff competition in the U.K. and restrictive trade and labor laws in Germany. The company has fared better in many Asian and North and South American countries, and it claims strong growth in Mexico, Canada and Brazil.

Wal-Mart and other global names rely increasingly on international operations for growth. In the first nine months of Wal-Mart's current fiscal year, the retailer's international operations -- which account for 20% of its sales -- saw operating income climb more than 10% while its U.S. stores notched gains of less than 7%.

While Wal-Mart and its global peers haven't been allowed into store ownership in India, the U.S. company has been building its local presence for years. In 2005, it bought about $1.5 billion of Indian sheets, T-shirts and jewelry to supply its stores around the world. Wal-Mart has been surveying the market, building a local team of managers and meeting politicians and bureaucrats.

Wal-Mart executives have been among the industry's strongest lobbyists. The company has used high-profile executive visits and pamphlets to preach to India's public and political leaders -- even those from India's Communist Party -- about how international retailers can transform distribution systems and lower prices. Last July, Wal-Mart Chief Executive Lee Scott traveled from the company's Bentonville, Arkansas, headquarters to Washington, D.C., to talk with India's prime minister, Manmohan Singh, during his U.S. visit.

Wal-Mart's global competitors, including Carrefour SA of France and Metro AG of Germany, have teams in India talking with regulators and potential local partners. "We have taken a long-term view that we will be there" in India, says Gerard Freiszmuth, managing director of Carrefour India who moved to New Delhi to help prepare for the market-opening. Meanwhile, a spokesman for Tesco PLC said the U.K. retailer has no plans to enter India.

India's leaders want to attract the international capital and expertise needed to modernize the country's retail industry and distribution system. Indian Finance Minister P. Chidambaram said in November the first steps to open the market could happen during the first quarter of 2006.

To be sure, India has been talking about opening the retail industry to foreign investment for more than a year. It has been blocked by opposition from leftist parties that support the Congress Party's ruling coalition. Communist leaders are concerned foreign retailers will hurt the tens of millions of people dependent on small shops for their livelihoods. Wal-Mart argues that international players are key to streamlining national distribution systems to cut waste and stabilize prices for perishables.

The U.S. company has another carrot to dangle in front of India: its huge buying power. Once it opens stores in a country, it is more likely to supply its international stores with that country's products. Even without stores in India, Wal-Mart is already a bigger consumer of Indian products than many countries.

From China, the company exported $20 billion in goods last year. "What we found in China as we get stores on the ground and get more mass, we get to know a lot more of the suppliers," Mr. Menzer told analysts last year. "And when we know the suppliers, it gives us the opportunity to learn the product of the suppliers and actually export them."

That is easier said than done in India, given its poor infrastructure. The company will likely have to build distribution systems from scratch and struggle with bad roads and power outages. It will also have to contend with new national retail chains, such as Shoppers' Stop Ltd. and Provogue (India) Ltd.

While India might not allow 100% foreign ownership in retail businesses right away, it might allow smaller stakes with restrictions, analysts say. It could allow minority stakes with Indian joint-venture partners or limit foreign investment to specific businesses such as groceries or luxury goods. At first, the government is likely to restrict the locations and number of stores allowed.

Whenever and however India opens up, Wal-Mart hopes to apply lessons learned in other emerging markets. When it first arrived in China more than 10 years ago, it mistakenly stocked stores with bestsellers from the U.S. It quickly learned that the average Chinese consumer didn't have closet space for boxes of 40 rolls of toilet paper.

Wal-Mart now has 51 stores in China and plans to open 39 more this year. While Chinese operations account for less than 1% of Wal-Mart's $285 billion in sales, its China sales could quickly climb to $20 billion, says Emme Kozloff, an analyst with Sanford C. Bernstein & Co.

In the subcontinent, Wal-Mart is aiming for slow and steady growth. "It has to be a measured pace that supports the government's desires," Mr. Scott, the CEO, said at an investors conference last year.


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