Will Wal-Mart Succeed in India?

Perhaps...But It Won't Be Easy

Published: December 14, 2006 in India Knowledge@Wharton

"He doesn't realize it, but I know everything about

him,"says Indian retail magnate Kishore Biyani about a youngman sitting with him in a
Mumbai hotel meeting room inearly December. "I see that he is wearing Colour Plustrousers. I
know his waist size ... I know everything about him. We are a company of observers,
andeverybody is trained to observe customers," says Biyani, who is CEO of the Future Group
and managingdirector of its flagship Pantaloon retail chain that last year had revenues of Rs.
2,018 crore ($450million) and expects to become a $1 billion company by mid 2007.
Biyani often spends Sundays hanging about unobtrusively and watching shoppers at his
company's 200clothing stores in 32 Indian cities. The home-grown retailer's obsession for
observing the average Indianconsumer also at public places like temples and movie halls
underscores what could be Wal-Mart'sbiggest challenge as it sets up shop in India in
partnership with Bharti, a leading telecom servicesprovider. "India is a very diverse country --
we have 6,000 castes and sub-castes in 28 states, and everycommunity has its own tastes;
every state has its own nuances," says Biyani. "To manage the diversityand the heterogeneity
will be one of the biggest challenges for anybody who comes to this market."
Enigmatic India and its challenges in transportation, warehousing and distribution
infrastructure haven'tdeterred the world's biggest organized retailers that have lobbied --
unsuccessfully so far -- with theIndian government to permit foreign direct investment in the
retail industry. Wal-Mart battled stiffopposition from Indian retail chains and found an open
backdoor, forming a joint venture with Bharti tosupply back-end supply chain technology and
related processes; Bharti will handle the front-end ofowning and running the stores, which are
likely to be co-branded. The terms of the deal haven't beendisclosed, but media reports put
Wal-Mart's proposed investment in the venture at $100 million initially,rising to $450 million in
a few years.
Cash and Carry
Waiting in the wings and actively negotiating with several Indian companies as potential
partners areTesco of the U.K. and Carrefour of France. Some, like Germany's Metro and South
Africa's Shoprite,have already entered India with a cash-and-carry business that supplies only
retailers, restaurants andbusiness houses where the Indian government permits FDI. Wal-Mart
is also entering the cash-and-carrybusiness, with Bharti supplying Wal-Mart's stores in India.
Moreover, many large Indian companies -including Reliance Industries, the Aditya Birla group,
and other regional firms -- have recentlyannounced ambitious plans in retailing.
India's retail industry is one of its fastest growing (with a 5% compounded annual growth rate)
and has$320 billion in annual revenues this year, according to a report titled, "Retail in India:
Getting Organizedto Drive Growth," released recently by consulting firm A.T. Kearney and the
Confederation of IndianIndustry (CII). Never mind that Wal-Mart's $315.6 billion in global sales
last year is about the size of theentire Indian retail industry. "Rising incomes and increased
consumerism in urban areas along with anupswing in rural consumption will further fuel this
growth to around 7%-8%," the authors say, peggingIndia's consumer class with rising disposable
income at 400 million people.

But now that Wal-Mart plans to enter India, attention is focused on the retail giant's India
strategy.Wharton professor of marketing Jagmohan Raju says one big challenge Wal-Mart
will face in India hasto do with how it is perceived by consumers. "In the U.S., when you think
of a big warehouse store, youthink of lower prices, and small, boutique stores have higher
prices," he says. "In India, the perception isexactly the opposite -- the bigger store has higher
prices; smaller shops can offer lower prices becausetheir overheads are lower. How will Wal-
Mart's positioning of lower prices carry forward in a mindsetwhere customer perceptions of
big versus small are so different?"
Consumer Behavior
David Bell, Wharton professor of marketing, says Wal-Mart's business model is founded on
"everyday low prices for consumers and squeezing costs out of the system, and customer
service with friendly people who greet you." But those, he argues, do not guarantee shopper
traffic, as consumer behavior is dramatically different across global markets. Coca-Cola
might adjust to people's preferences in different markets by making its drink sweeter or more
effervescent. Or McDonalds could allow people to consume alcohol at its restaurants in
France and make hamburgers with rice patties in Japan. "But there's considerably more
variation in the way people shop for products than their underlying preference for the
products themselves," Bell says. "This is what makes it more difficult -- not just for Wal-Mart
in particular, but for any retailer -- to be truly global."
Changes in consumer preferences that Wal-Mart will encounter have to do with simple
things like how often people like to go to a store or what motivates them to choose one
store over another. "In local markets, you have dynamics of retail competition, variations in
the frequency with which people like to shop, variation in the kind of products that drive
people to the store, variation in the importance of the retail assortment."
It is too early to tell if some of the controversies Wal-Mart has faced in the U.S. will crop up in
India, too. "In the U.S., a number of small towns did not like Wal-Mart for a couple of different
reasons," says Bell. "One is purely aesthetic -- these big boxes look pretty ugly -- and the
practice of having huge buying power can be detrimental to the local economy -- people who
try and compete on price. Thirdly, they are criticized for their employment practices, such as
their benefits, and ethnic and gender discrimination in hiring."
Wal-Mart's most immediate challenge could be finding real estate at preferred locations and
financing it at the prevailing prices. Biyani says his group bought most of its real estate long
before the current price boom. "If we were to do business at today's rates, we'd have to shut
down," he says. "The Wal-Mart model is very real estate hungry," says Raju. "They need a lot
of real estate, close to where people live, and have easy access to them. The Wal-Mart model
also relies on the fact that everything is on display, which requires lots of space."
Raju notes that if, as many industry watchers expect, Wal-Mart sets up its stores on the
outskirts of urban centers, other challenges could emerge. "If you are going to travel by train,
you'll have to carry your purchases in a bag, and then you'll buy less," he says. "If you drive
your car there and load it up, Wal-Mart should have a place to park all those cars." Some
industry experts have argued that the typical Indian consumer does not travel more than 6
km (3.75 miles) or 7 km to shop, and that few suburbanites own cars.
Raju says he expects Wal-Mart to adopt a blended model of its traditional format tweaked
to fit the reality of Indian real estate. "It would be stores where you have all the products on
display, but you don't pick it up and put it in your cart yourself." This would involve
something like a handheld computerized device, he says, into which customers enter
information about the products they want to buy. They would then collect their purchases at
a checkout point at street level and drive away, or have them delivered to their homes.
More blending might be on the way, especially in cultural nuances. Wal-Mart's recent debacles
in Germany and Korea, where it sold out to local retail players and exited, could be wake-up
calls. In Germany, Wal-Mart's low price strategy failed to win it a distinctive market position
simply because two other well-entrenched retailers -- Aldi and Lidl -- have been following
that strategy for years, says Bell. He notes that Wal-Mart was also faulted for relying too
heavily on a U.S.-driven view of how Germans shop, made worse by populating its top
management in the country with U.S. expatriate executives, many of whom couldn't speak
German. Thirdly, the Wal-Mart strategy of a price-service combination with friendly greeters
and so forth backfired. "Culturally, greetings and friendliness in stores are viewed by the
Germans with a lot of suspicion," says Bell.

Rites of Passage
Wal-Mart also had some lessons to learn in South America a couple of years ago, when it
discovered that the design and layout of its stores did not match shopper preferences. "In
South America, shopping forsome families is a social or an entertainment-driven event," says
Bell. "You have the whole family or the extended family shopping together, so you need
much wider aisles." That, he says, is unlike what Wal-Mart is used to in the U.S., where a single
person typically shops for the entire household, while other family members are looking after
the children or at work. "It seems like a fundamental thing, but you could never predict that
coming from the outside unless you have a local partner."
Chastened by these experiences, Wal-Mart may not face the same problems in India. Bharti,
its local partner, is a leader in the mobile phone services industry and must have deep insights
into Indian consumer behavior patterns. Even so, there could be surprises, as Biyani's Big
Bazaar store chain learned the hard way a couple of years ago. The chain had bought
100,000 white cotton shirts, expecting gooddemand. But sales were slow, and promotional
campaigns fell flat. It soon figured out why: The demographic profile of Big Bazaar's middle-
class shoppers meant people who commute in crowdedtrains and buses and not in air-
conditioned cars. For them, white shirts are high-maintenance hassles,needing frequent
laundering. The group eventually liquidated its unsold inventory of white shirts
throughheavily discounted sales.
Wal-Mart's legendary success at procuring its supplies at extremely competitive prices has no
doubtpleased its customers to whom those savings are passed on, but critics have accused it
of compelling itssuppliers to survive on very thin margins. Here, Biyani says he works
differently. "We are not likeWal-Mart; we believe in a situation of win, win and win," he says.
"The supplier should win, we shouldwin and the customer should win. In Wal-Mart's strategy,
and maybe that of other international retailers,the company wins and the customer wins.
Somebody has to lose for those two to win." Future CapitalHoldings, a Biyani-run private
equity firm, last month raised $830 million that it has begun investing asvendor financing in
manufacturers of foods, garments and fashion jewelry, among others. Products ofthese
companies get captive shelf space at the Future Group stores.
Raju says existing national brands will need to plan their response to Wal-Mart very
carefully to ensurethat while they get to supply the retail giant, they also don't alienate their
smaller store buyers. "They areused to it in the U.S.," he says. "Right now, Hindustan Lever
deals with a lot of small stores. Tomorrowthey will be dealing with large buyers like a Wal-
Mart or Reliance Retail, so the relative power structureof buyers and who is supplying will
change. This is a challenge they have faced in developed marketswhere they deal with the
Tescos and Safeways." He expects the national brands in India, such asHindustan Lever and
Procter & Gamble, to figure out ways to help small stores with specially tailoredservices "to
ensure they also thrive and do well."
Raju sees bigger benefits flowing to other players in the retail supply chain, such as
farmers."Companies like Wal-Mart coming to India, I hope, will help farmers because there
will be fewer playersin the chain," he says. "Farmers could form cooperatives to supply
directly to Wal-Mart rather than haveto deal with multiple intermediaries."
Party Spoilers
India's retail promise must seem tempting, but that outlook "is tempered by the fact that the
country isgrappling with severe infrastructure and policy issues," says the CII in the report it
produced with A. T.Kearney. "Cold chains [distribution chains for perishable items],
warehousing and logistics infrastructurewill fast become unmanageable challenges for India if
proactive action is not taken." It points to policyregimes that vary across states, "inadequate
quality control and the lack of a skilled workforce."
Biyani doesn't buy all that, arguing that "India is a nation of dukaandars (shopkeepers) and
that enoughretail talent is available. He also dismisses concerns about distribution and
logistics infrastructure with asimple, rhetorical question: "Have you [in the recent past] faced
a shortage of anything you wanted to simple, rhetorical question: "Have you [in the recent
past] faced a shortage of anything you wanted tobuy?" Biyani scoffs at Wal-Mart's logistics
and supply-chain strengths. "Where will they run their Volvotrucks here?" he asks, adding in
a lighter vein, "They will probably have to have bullock carts andhandcarts in their supply
chain."

Raju points out that Wal-Mart's efficiencies stem from the scale of its purchases, which
determines whatprices it pays suppliers. "Suppliers are willing to work with them because if
they don't work with themthey lose a big part of the market," he says. The Wal-Mart buying
center at its Bentonville, Arkansas,headquarters "is huge, and that's why most of the
companies' vendors have their branch offices in the citywhere Wal-Mart's headquarters are
located," adds Raju.
Coping with Oversupply
Organized retail is just beginning in India, but plans call for some 600 malls to be built over
the nextdecade across the country. The nascent industry in India could learn valuable lessons
about what wentwrong with retailers in the U.S., leading to bankruptcies, closures and sell-offs
at companies like K-Mart,Caldor and Bradlees.
"What went wrong [in the U.S. market] is oversupply," says Martyn Chase, chairman of
Donaldson, aLondon-based company that manages 350 retail malls across Europe. "One
mall gets built, andsomebody builds a new and bigger mall nearby, so the previous one is
killed." He doesn't see animmediate threat of that happening in India, but says "you will get
casualties in 10 years when you havetoo many of them." He attended a CII-organized two-
day conference on the retail industry in Mumbai inlate November, and is trying to persuade
his European retail mall clients to invest in India.
Chase says the way to prevent hemorrhaging and consolidation in the industry is to bring
regulatoryoversight. "You need proper regulations governing mall locations, mall size and
the like," he says."Before you are allowed to build a mall in the U.K., you have to
demonstrate there is a need for it, byproving that there is enough demand from people
who live in that area to make the mall work."
Biyani argues that the underlying dynamics of standalone retail are not attractive.
(Pantaloon's urbanlocations put it in a different market segment from that of the big box
centers Wal-Mart might put up oncity outskirts.) "In India, no retailer has made big money so
far," says Biyani. (Pantaloon's profits lastyear were 3% of revenues.) "The money is in the
peripheral activities; it's never in the retail itself. It'sthe power of retail that gets you the
money; it's never the transaction that gets you the money."