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:

1. 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)

2. Wal-Mart employees earn 20 percent less than retail workers on average.

3. 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)

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:

1. 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;

2. 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.

3. Drogin, R. (2003) “Statistical Analysis ofGender Patterns in Wal-Mart’s Workforce”,Submitted as an expert report in Dukes v. Wal-Mart Stores

4. Indranil Bose: WAL-MART AND BHARTI: TRANSFORMING RETAIL IN INDIA; Asia Case research Centre, University of Hong Kong, 2012

5. Layton, Roger 2007 Marketing Systems--A Core Macromarketing Concept. Journal of Macromarketing 27 (September) 227-242.
6. 
   
7. Galbraith, John K., 1956 American Capitalism: The Principle of Countervailing Power. Boston: Oxford University Press.

7. 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.

8. 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.

9. Padmanabhan , Mallika,(2012). Walmart’s Struggles in India: How Institutional Contexts Can Limit Foreign Entry; http://gnovisjournal.org ; Volume XIII Issue I Fall..

10. http://www.ukessays.com/essays/marketing/bharti-wal-mart-case-study-marketing-essay.php

11. 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

12. Guruswamy, Mohan (2005). Is Wal-Mart what the doctor prescribes? Hindu Business Line, Friday, May 27.

13. 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.

14. 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.

15. 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

16. http://pubadvocate.nyc.gov/news/2011-01-11/new-study-wal-mart-

     means-fewer-jobs-less-small-businesses-more-burden-taxpayers

17. http://ageconsearch.umn.edu/bitstream/62124

18. (http://www.americanessays.com/study-aids/free-essays/marketing/challenges-wal-mart-in-india.php