Wal-Mart in India: A Case Study
Ananda Das Gupta
I
On 27
November 2006, Bharti Enterprises Ltd (“Bharti”), one of India’s
principal business groups, and American retail giant Wal-Mart Stores Inc
(“Wal-Mart”), entered into a joint venture with equal partnership for both
companies. The partnership would give Wal-Mart access to the highly regulated
Indian retail market, which was valued at US$320 billion. Bharti would own
retail shops under the Wal-Mart franchise and the companies would jointly
operate in areas of the Indian retail industry which were accessible for
foreign investment, such as logistics and cash-and-carry.
This
partnership between the US
retail giant and one of India’s
most successful corporate houses was expected to bring a dose of modernity to
the Indian retail landscape. It could be questioned, however, how Wal-Mart
would cope with the opposition it faced from local shop owners and civil rights
groups given its poor reputation with regard to social responsibility. In
addition, the state of the country’s transportation network was very poor and
the question remained how Wal-Mart planned to implement its supply chain
management model in India.
The growth
of the organized retail sector was pushed by significant shifts in Indian
population demographics. Major drivers included a large number of working
youths with a median age of 24 years (in 2006, more than 67% of the population
was aged below 35 and approximately 52% was under 24), growing numbers of
working women, many nuclear families living in urban cities and a boom in
opportunities in the services sector. This shift in demographics led to an
increase in consumer purchasing power and higher consumption spending in India’s
retail market. In 2005–2008, the forecasted growth in consumption spending was
around 7.1%. Market research firm A.C. Nielsen placed India together with Thailand,
Indonesia and China
in the top segment of its Aspiration Index, measuring “the relationship between
current ownership levels and future intentions to purchase a vehicle ...,
highlighting countries of high future demand”. (AC Nielsen Company Website
(16 March 2005) “Asians in the Driving Seat for Future Car Ownership”,
http://hk.nielsen.com/news/20050316.shtml (accessed 10 July 2009; reference 1).
Media
reports speculated that Wal-Mart had proposed an initial investment of US$100
million, which would rise to US$450 million within a short period of time.
Because the regulatory environment in India did not allow non-domestic
retailers with several brands to sell directly to customers, the companies
decided to operate as wholesalers and offer back-end support to new or existing
local retailing companies. In addition, domestic retailers were permitted to
run stores that sold non-domestic brands under a franchisee agreement with the
producers. Wal-Mart and Bharti thus planned to use two different formats for
their stores: a franchised retail company and a wholesale cash-and-carry joint
venture. With the proposed joint venture, Wal-Mart and Bharti had found an
arrangement that would allow the US retail giant to enter the huge
Indian retail market.
(Knowledge@Wharton
(14 December 2006) “Will Wal-Mart Succeed in India? Perhaps ... But
ItWon’tBeEasy”,http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4133(accessed
6 January 2008; Reference 2)
Within the
US,
Wal-Mart had been the subject of the country’s biggest gender-discrimination
lawsuit ever. Women in management positions had been paid nearly US$5,000 less
per year in 2001 than men with the same job classification. Wal-Mart had also
been prosecuted several times for adopting temporary but significant price cuts
to drive out competition, a practice known as “predatory pricing”. Finally,
Wal-Mart had been criticised for squeezing suppliers for lower-cost manufacturing
without ensuring product quality or safety in certain instances.(Drogin, 2003)
Dealing
with India’s
unique cultural factors was one of the issues that Wal-Mart and Bharti were
facing. In a country with more than 6,000 castes and sub-castes, managing such
diversity and heterogeneity was a big challenge for any international company
entering this market. According to the opposition party, the left-wing
political party and various NGOs, if Wal-Mart were allowed to enter the Indian
retail sector, this would ruin the livelihoods of more than 40 million people
who depended on retailing.
(Bose,
2012).
II
When
viewed in its entirety, marketing is appropriately considered a societal, or
national, provisioning system for goods and services. How well such systems
currently perform and what could or should be done to improve their overall
effectiveness has long been a macro marketing concern (Layton 2007). We will
consider specifically a long standing social concern, the future of small scale
retailing. Should government try to protect small retailers from being driven
out of business by their larger competitors? Those who would have government
defend “the little guy” argue that this is simply the right thing to do.
They also
maintain that once these smaller firms are gone, there will be no way to
protect customers from being exploited by the few remaining sellers. The “pure
and perfect” market concept, drawn from economic theory, suggests that markets
operate best when there are many buyers and sellers, none of whom is large
enough to have any effect on the price at which a homogeneous product is being
sold. However, others, including John Kenneth Galbraith (1956), have argued
that customers are better served when there are only a limited number of
suppliers, each large enough to be able to afford to improve their product
offerings. Others have argued that the role of government is not to protect any
particular type of competitor, but rather to make certain that markets remain
competitive whatever the number and/or size of the buyers and sellers.Whether
small retailers should be protected has now become part of the fierce and broad
ranging debate over Wal-Mart and “the Wal-Mart effect”. That firm, in a
relatively limited period of time, has become the world’s largest business
organization. That rapid growth has had a harmful effect on the firms that must
compete with Wal-Mart, especially those operating in the small to medium size
American communities in which Wal-Mart first established itself. When a new
Wal-Mart, often accompanied by other large retailers, opens in a suburban
location, long established “down town” merchants are often driven out of
business. For this reason, because of concerns about traffic congestion and
pollution, and, most importantly, because those who think they would be
adversely impacted have been effective lobbyists, many communities have kept
Wal-Mart from opening a local branch.
Wal-Mart
has also been widely criticized, some would argue unfairly and without
justification, for underpaying its employees, for relying primarily on
part-time staff not entitled to employee benefits, and for not providing its
American employees with health insurance. In addition, the hard bargaining
Wal-Mart does with its own suppliers, it is often argued, has required those
suppliers to close some of their American plants and to manufacture, instead,
in China.
Because of its size and business practices, Wal-Mart have almost certainly
become, rightly or wrongly, America’s
most widely criticized business. On the other hand, consumers throughout the
world continue to shop at Wal-Mart and similar mega-outlets that compete
primarily on price. By doing so, they save significant amounts of money on each
item and can thus afford more of the things they want. Wal-Mart’s supporters
believe that the firm is operating as it should and that, as a result,
consumers are far better off.
As India grows,
driven by its success in information technology and services, there is another
revolution waiting to happen in the Retail sector dependent on whether the
Government of India can unshackle the various inefficiencies that are keeping
this industry constrained. Retail in India is estimated at nearly US$
400 billion and is growing at a CAGR of 9 percent (AT Kearney GRDI 2010). 96
percent of this sector remains un-organized and constitutes a workforce that
have taken to self-employment for daily subsistence due to an overcrowded
agriculture sector and lack of employment opportunities for lesser skilled
workers in the manufacturing or services sectors.
Food and
groceries form nearly 60 percent of India's retailing followed by,
among others, clothing and footwear at a distant 9 percent of retail. Despite
the size of this market, retail and its food supply chain remains unorganized
and inefficient. A lack of investment, technology and process control in the
agriculture supply chain leads to tremendous waste accounting for nearly 25-30%
of fruits and 10% of grains produced. Also, the related and supporting
industries for food processing, cold chains and crafts remain nascent. In a
grim reflection on the situation, a politician in India recently remarked that Indian
consumers buy shoes in air-conditioned stores but food on the streets. (Das,
2011)
When
comparing the presence of Walmart and small traditional stores (STS) in India, how can
the institutional context – formal policy and informal constraints – help
explain the differences in economic success? There is no lack of academic study
on corporate expansion into developing countries, especially the booming
markets of China and India. However,
what many studies fail to acknowledge is the presence of embedded institutional
factors that are tantamount, if not more important, to determining economic
performance. Even a recent study done by Chattopadhyay, Dholakia and Dholakia
(2010) on the reasons that STS have continued to be frequented in light of
corporate presence like Walmart does not go far enough to explain the
theoretical role of institutional contexts, choosing instead to focus on anecdotal
evidence and interviews.
Walmart’s
presence in India
today cannot be assessed only by contemporary or economic factors. When using
the narrow lens of economic performance via the enforcement of formal rules, it
appears as if the U.S. retail giant has run into and will continue to run into
very few obstacles on its way to setting up shop in the South Asian country –
which is why the contradiction behind the retail giant’s struggles in India
continues to be a puzzle. Existing academic literature on the topic simply does
not present a holistic narrative behind Walmart’s and other foreign retailers’
struggles. In order to understand the myriad factors at work, both formal and
informal, we must study the story of Walmart in India using the concept of institutional
contexts.
( Padmanabhan,
2012).
III
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.
The
threats of substitute
The threat
of substitute is not very high. As people have to eventually shop at some place
for their groceries and items which they would use in their daily life. There
is a possibility of substituting brand name items with generic items if the
price points do not match.
PEST
analysis
Political – The Political situation is a cauldron of controversies, where there is
no clear national consensus on organized retail. While many feel that it would
benefit retail overall others feel that it would drive out the small retailer.
Many have even stronger feelings for entry of international retailers into India. And many
feel that this is a backdoor entry of the world’s largest retail store chain
into India
which still has strict FDI limits in the retail sector.
Economical
and Ecological: There are likely to be a
lot of economic and ecological effects of this joint venture. The benefits of
various vendors would certainly be positive. In addition there would be a
positive impact on infrastructure as there would be a requirement of good
roads, Warehouse facilities, ports , this would come up with either investment
of the Joint Venture or other combination of Private or public partnership.
Social – There would be a strong impact on the social fabric of the nation as
the farm sector which supports a large portion of the population would be
affected. There would be an impact on the small retailer, and if the impact is
even temporarily negative it may have severe social consequences. Many retail
stores have seen strikes and protests in India due to the perceived view
that it drives out small retailers.
Technology
- The impact of technology will certainly be felt in
the Joint venture. The best practices globally technologically will enter India through
this joint venture. The impact can be unpredictable. The technology in most
western countries is often used to reduce manpower. In India, that
often is not necessarily the most desirable or viable approach. However in an
Interview with Bharti managers many felt that some of the latest technological
trends in retail like RFID etc will impact this JV positively.(http://www.ukessays.com/essays/marketing/bharti-wal-mart-case-study-marketing-essay.php
; reference: 10)
From the
time Wal-Mart's proposed entry into India
came into the news, there were widespread protests from small retailers' groups
and the Left parties against allowing the company into India. Opposition also came from
business groups and companies which were already operating in the organized
retail sector. All of them, perhaps rightly, feared Wal-Mart's formidable
competitive strengths. The protesters argued that Wal-Mart was notorious in all
its markets for trying to monopolize the retail sector.
The Reason
for opposition:
There are
several reasons, some fundamental and some superfluous, against Wal-Mart and
other large international retailers establishing shops in India.
Calamity for Kirana Merchants
One might wonder why, on the one hand, India is very receptive to the foreign direct investment (FDI) in its manufacturing, information technology, and financial services sectors, but, on the other hand, quite hesitant to encourage the same in its retailing industry? There are about 12 million retail outlets in India which account for 97% of its about $258 billion in annual retail sales (Elliott 2006). About 70 million Indians depend upon these small kirana (grocery) stores, mom and pop shops, and mobile handcart businesses for their livelihood (Institute for Local Self-Reliance, July. 21, 2005). These retailers exist at the end of the distribution chain, selling to the ultimate consumers. Millions of others work as intermediaries between the manufacturers, growers, wholesalers, and the retailers. Wal-Mart's coming to India, endowed with an array of modern equipment, methods, and management expertise will make these intermediaries, retailers, farmers, and manufacturers lose their jobs. According to Guruswamy (2005), eight million people would lose jobs if Wal-Mart or similar stores captured just 20 percent of the retail trade in India (Elliott 2006). These statistics are frightening for a country which is already suffering from high rates of unemployment and poverty.
Threat to
Large Indian Retail Firms
Pantaloon, Shoppers' Stop, and Westside are among a very small number of large chain retailers which already operate in different parts of India. The Pantaloon group, the largest discount retailer in India, includes Pantaloon apparel stores, Big Bazaar hypermarkets; and Food Bazaar. They Indian mega-retailers feel threatened by the entry of Wal-Mart and other global retailers who want to start their operations in India. An average-sized Wal-Mart store operates with 200,000 square feet of space. Pantaloon's flagship Big Bazaar operates with only about 50,000 square feet of space (Reddy 2005). It would be like David versus Goliath. It may be noted that Bata, Godrej, Hero, Malhotras, Raymond, Reliance, Shopper's Stop, and Tata companies are among the other growing native large retail chains in India.
Unions Oppose the Anti-Union Retailer
The Indian labour unions are against Wal-Mart coming to India because Wal-Mart is against unionization. In the U.S., its home country, it has prevented its employees to form any union. It, however, is unionized at one of its stores in Canada. In China, under pressure from the All-China Federation of Trade Unions and the Chinese government, Wal-Mart agreed to allow unions if the Chinese workers would request to join one (BBC News 2004; reference 14).
However, unlike Canada, workers are much poorer in India; and unlike China, India is a democracy. Labor in India is more organized and powerful as compared to its counterpart in many other countries. For example, according to the Indian labor laws, any company employing more than 100 workers cannot fire employees without first obtaining government permission to do so. Likewise, no worker can be made to work more than 75 hours of overtime a quarter (Rai 2006).
It is not uncommon for labour unions to go on strike when it has not been able to reach an accord with the management over the issues under dispute between them. At times, there are country-wide labor strikes involving millions of workers. Workers also resort to slowdowns, dharnas (sit downs), walkouts, and strikes. Most labor activities against management relate to the issues of wages, benefits, pension, fair-treatment, and job security. Generally, these activities are peaceful. Occasionally, however, they do become violent and destructive. Likewise, the management may also resort to plant closeouts to contain its costs and protect its property. It may be pointed out that while the foreign companies in India are struck less often than their Indian counterpart, they do get their share of the labor unrest. The two-week strike by workers at the Toyota Motors plant in Bangalore and another strike by workers at the Honda Motorcycles & Scooters' plant in Gurgaon, near New Delhi, are just two examples of labour problems at foreign companies in India.
In order to capture the Indian
market wal mart is trying to introduce low price strategy on their products
which inturn affect the other local businesses. Local traders later also should
implement this pricing strategy which may affect their profit margin. But in
return the consumers may benefit a lot from this. Local traders from the major
of the cities were opposed the entry of retail giant Wal-Mart especially in Delhi because it will
affect the local traders or business man and also for small retail shop. They
have the issue of domestic traders will be totally neglected. By letting Multi
Brand retail giants like Walmart to directly and indirectly penetrate into the
Indian retail sector is violative of Articles 14, 19 and 21 and the Directive
principles of State Policy listed under Articles 38(1) and (2) and 39(a) and
(c) which direct the State to ensure the welfare of the people and strive to
minimize the inequalities in income.
One of the
biggest arguments in favor of Walmart has been that it will provide additional
employment. Entry of big retail is touted to create millions of additional
jobs. This again is not supported by experiences in the west. Indian Retail
largely dominated by family owned Kirana stores already employs more
than 4 million people. In addition to these a significant number of people work
in the supply chain and distribution areas. Walmart is expected to create but
does not consider the jobs that will be lost due to shutting down of thousands
of Kirana stores. What this means is that in the near future an owner of
Kirana store may end up becoming a minimum wage labourer in a Big Box
Retail store!
It is
argued that Walmart will help get workers get better pay. This is far from the
truth. Walmart is a cost competitor driving down costs of suppliers, farmers
and employees to ensure low prices can be offered to consumers and large
profits for the shareholders. Walmart is known to provide one of the lowest
paying jobs. Empirical evidence and studies show this:
- Wal-Mart’s average annual pay of $20,774 is below the US Federal Poverty Level for a family of four. (http://pubadvocate.nyc.gov/news/2011-01-11/new-study-wal-mart- means-fewer-jobs-less-small-businesses-more-burden-taxpayers; Reference 16)
- Wal-Mart employees earn 20 percent less than retail workers on average.
- Walmart not only drives down wages of its own employees but also reduces wages in supporting industries. National Employment Law Project (NELP) study shows that Walmart’s outsourcing depresses wages In U.S. Warehouses
This is one of the biggest canards
being spread by the government. India
is a signatory to the Bilateral Investment Promotion & Protection Agreement
(BIPAs) which makes it mandatory for the state governments to let the likes of
Walmart operate. By eliminating middleman, distributors and small time
retailers, Walmart has become the single biggest middleman gobbling away all
the profits from the farm to the fork, thus helping the founder Sam Walton’s
family earn a combined wealth in excess of $100 billion which is roughly equal
to the wealth of the bottom 40% of Americans combined. Do we in India want emulate the US and help accelerate this wealth
of the Waltons at the cost of our farmers, consumers and Kirana shop
owners is the big question.
Further, one of the arguments in favor Big Box
Retail has been that this will eliminate multiple layers of middlemen thereby
giving better prices to the farmers. In theory this does sound very plausible,
but in practice by eliminating layers of middleman Big Box retail manifests
itself instead as the single biggest middleman leading to an Oligarchy – very
few Big Box retailers providing limited choice for both the farmers and end
consumers. Empirical evidence in developed countries tells us that in reality
the farmers get squeezed by Big Retailers and get paid very poorly for their
produce:
Farmers in Punjab have supposedly benefited by indulging in Contract Farming for Bharti-Walmart, PepsiCo(Lays Chips) etc. But there have also been reports of big firms entering into contract farming agreements with the farmers and then going back on their commitment when the produce is available cheaper from other sources.
(http://ageconsearch.umn.edu/bitstream/62124; Reference 17)
Farmers in Punjab have supposedly benefited by indulging in Contract Farming for Bharti-Walmart, PepsiCo(Lays Chips) etc. But there have also been reports of big firms entering into contract farming agreements with the farmers and then going back on their commitment when the produce is available cheaper from other sources.
(http://ageconsearch.umn.edu/bitstream/62124; Reference 17)
Future Scenario
Consumers are the key for the success of any business, and the taste and
preference of customers varies from one country to another one religion to
another and one culture to another. It is most important to be successful for
all companies to completely understand the needs and demand of each and every
customer. Wal-Mart believes in standardization approach in their global
operation.
By doing that it has got success in those countries which cultures are
similar to the American culture, but failed in that country where that format
was not accepted by the local customers. To be successful in India where cultural difference is a major
factor, Wal-Mart has to make suitable change in their business strategies to
meet the demand of the consumer of India. It has to learn from each
culture about their food habit, clothing pattern, buying ability and
accordingly has to set up its business plan. A joint venture with an Indian
company like Bharti is a positive strategy towards the direction of success.
In addition to be successful in India, apart from low prices Wal-Mart has to
concentrate on few other key issues which can lead them to achieve its desire
goal in India.
Those are:
- Maintain a mutually understanding, effective and efficient working partnership with Bharti Enterprise and
- Has to give more importance in market research to understand the domestic market and Indian consumer type to fulfill their needs and demand accordingly.
(http://www.americanessays.com/study-aids/free-essays/marketing/challenges-wal-mart-in-india.php;
Reference 18)
At the same time Wal-Mart should start a campaign to help the “little
guy.” In a campaign of this sort,
Wal-Mart could focus on promoting the other small specialty stores in their
community. They could help advertise for
local shops that do not sell competing products, but complimentary ones. Instead of taking sales away from themselves,
Wal-Mart could change their image to one of a company that cares about the
community.
**********
Reference:
- AC Nielsen Company Website (16 March 2005) “Asians in the Driving Seat for Future Car Ownership”, http://hk.nielsen.com/news/20050316.shtml (accessed 10 July 2009;
- Knowledge@Wharton (14 December 2006) “Will Wal-Mart Succeed in India? Perhaps ... But ItWon’tBeEasy”,http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4133(accessed 6 January 2008.
- Drogin, R. (2003) “Statistical Analysis ofGender Patterns in Wal-Mart’s Workforce”,Submitted as an expert report in Dukes v. Wal-Mart Stores
- Indranil Bose: WAL-MART AND BHARTI: TRANSFORMING RETAIL IN INDIA; Asia Case research Centre, University of Hong Kong, 2012
- Layton, Roger 2007 Marketing Systems--A Core Macromarketing Concept. Journal of Macromarketing 27 (September) 227-242.
- Galbraith, John K., 1956 American Capitalism: The Principle of Countervailing Power. Boston: Oxford University Press.
- Das, Ashish Kumar.(2011), Should India open foreign direct investment in multi-brand retail : a case study using the Wal-Mart effect; MBA Thesis; Sloan School of Management; Massachusetts Institute of Technology, Sloan School of Management, 2011.
- Chattopadhyay, A., Dholakia N., & Dholakia, R.R. (2010, December). Standing Up to Goliaths: How Small Traditional Stores Influence Brand Choices in India. William A. Orme Working Paper Series 2010-2011, 7. Kingston, RI: University of Rhode Island, College of Business Administration.
- Padmanabhan , Mallika,(2012). Walmart’s Struggles in India: How Institutional Contexts Can Limit Foreign Entry; http://gnovisjournal.org ; Volume XIII Issue I Fall..
- Elliott, John (2006). Why there are no Indian Wal-Marts, Fortune, May 25, 12:09 PM EDT. http://money.cnn.com/magazines/fortune/fortune_archive/2006/ 05/15/8376903/index.htm
- Guruswamy, Mohan (2005). Is Wal-Mart what the doctor prescribes? Hindu Business Line, Friday, May 27.
- Reddy, Balaji (2005). Wal-Mart assault: India may forced to open its protected retail sector, but Wal-Mart for the first time will face real communists in India, India Daily, July.
- BBC NEWS (2005). Levi's told to pay Mexican damages, Monday 7 March, 22:14 GMT. http://newsvote.bbc.co.uk/mpapps/pagetools/print/news.bbc.co.uk/1/ hi/business/4327713.stm.
- Rai, Saritha (2006). Labor rigidity in India keeps firms on edge, International Herald Tribune, Internet Edition, February 9. http://www.iht.com/articles/2006/02/09/business/toyota.php
- http://pubadvocate.nyc.gov/news/2011-01-11/new-study-wal-mart-
means-fewer-jobs-less-small-businesses-more-burden-taxpayers
