ABSTRACT
This research looks at the challenges and possible solutions of globalizing a large-scale retail company. It considers the foreign investment strategies of the retail titan Walmart, how it has succeeded in 27 countries and how it plans to succeed in India as well.
First is an analysis of Walmart’s current global presence, followed by a critical look at its foreign investment failures in Germany and South Korea, the challenges Walmart faces by adapting its inventory and supply chain strategy to the Indian market, what it has learned from the research of current business practices in India, and what the future climate of India offers Walmart. The accomplishments of companies like Walmart mean a freer and more open market for developing nations like India and the globe, and directly and indirectly progresses consumers and firms worldwide toward a mutually beneficial global marketplace.
CAGE MODEL
Using the CAGE model, we identified problems company may face in the Indian market. There will be a cultural difference because the religious sectors that exist in India limits the types of products that can be sold and marketed effectively in Walmart stores. For example, the main religion in India is Hinduism which does not allow the consumption of beef. The second biggest religion is Muslims which does not allow the consumption of pork and alcohol. So, Walmart will need change what it puts on its shelves.
Also, a big part of the India’s culture is consumers in India enjoy the utility of convenience and often have deep rooted connections with the local mom and pop stores. The mom and pop stores allow them to have credit and goods can be send to the consumers home regardless of the amount bought. Administrative distance wise, India does operate the same way US does so Walmart will need to come up with a way that is effective in India. They can establish a top down corporate culture that can effectively handle administration and management functions in India.
And, there limits to FDI that attempt to facilitate the established local businesses. FDI is also still a sensitive topic in India with it being a center topic in political races. Geographic distance will also pose a problem. The different regions of India geographically present challenges in how to organize stores and the products. There are more that 20 officially recognized languages, 3 main religions and countless religious and ethnic festivals. Also, there many problems that can arise from acquiring and developing of land; price, vagueness of land titles and restrictions from the local government.
There is also the problem of economic distance. Since Wal-Mart’s business in India will not be a stand-alone operation, they must deal with the obligations of transferring investment capital internationally. There also extreme difference in wealth according to India’s caste system. India is also a developing country with infrastructure problems. Walmart will need to figure out how to manage an efficient supply chain management system.
FDI IN THE RETAIL MARKET
FDI in India soared from less than US $2 billion in 1991, when the country undertook major reforms to open up the economy to the world markets to about US $45 billion in 2005. Chakraborty & Nunnenkamp, 2008) According to the Global Retail Index (an annual study that ranks the top 30 developing countries for retail expansion worldwide), India is currently ranked 5th behind Brazil, Chile, China and Uruguay. (Kearney, 2012) According to the index, India’s GDP is expected to grow 8. 7% through 2016. Although the Indian market looks promising, there have been many troubles with this market. Many experts have been saying that this market is one to enter. However, it is important to note that even with the Global Retail Index, India has dropped in ranks since 2009 where it ranked 1st.
This due to the FDI regulations in India where single-brand retailers are still required to enter into the market through an Indian partner or joint venture. There have been more talks on policy change but nothing is certain. There are many problems to this market, from corruption and bureaucracy to the difficulty in obtaining land. (Economist, April 16, 2006) Ending the ban on FDI is fiercely opposed by the millions of kirana owners and their dependents who are important because they have the power to vote. Economist, Send for the supermarketers; retailing in India, April 16, 2006)
According to Ashutosh Varshney, “Indian politics will have to live with bargains and negotiations with regional parties. ” As per policy state governments can decide if they want the retailer in their states. Many lucrative states including Uttar, Pradesh, Gujarat, Tamil Nadu and West Bengal have said no to FDI in multi-brand retails. (Economist, FDI in retail: Unclear sourcing norms, stand of many states make global retailers wary of India entry, November 1, 2012).
The initial plan of allowing foreign retailers to open supermarkets in the country and owning 100% in single-brand retail chains is fading with many global players remaining reluctant to commit investments due to the unwelcoming stance of many state governments and confusion over local and sourcing norms. (Economist, FDI in retail: Unclear sourcing norms, stand of many states make global retailers wary of India entry, November 1, 2012)
As per the notification of FDI, foreign supermarkets are only allowed in cities with populations of more than a million people. 7 of the 53 Indian cities with a population of one million or more are in those states that are opposed to the central move. Bangalore and Chennai, which boast of high presence of modern retailers and are favorite launch pads for most of the foreign retailers, are out of bound. Given the current political state of India, it would be very important for foreign companies to check if the benefits will outweigh the cost and risk of entering the market. India’s political calculus in again in the flux.
The economy is in a tailspin and the current government is trying to regain credibility and power is now in the hands of regional political chieftains. (Yardley, September 27, 2012) According to Pratap Bhanu Mehta, president of the Center for Policy Research in New Delhi, “The incentive for every single party from the opposition to the allies is to send a signal that the Congress can’t govern. That’s the election plank. ” According to the same article, there are talks of a new national political alignment, a so-called third front to compete with the two national powers, the Congress Party and the opposition Bharatiya Janata Party.
And according to history, third-front governments have twice taken power and twice collapsed so if there is a third-front, India will seem like a very unstable prospect. When the coalition government pushed through an unpopular economic measure, including a policy shift enabling Walmart to open retail stores here, his party nearly collapse. Mamata Banerjee. The populist chief minister of the state of West Bengal declared the moves “anti-poor” and withdrew her regional party from the governing coalition. In conclusion, we think that India’s market for retail is not very good because of all the uncertainties in that market.
Even Walmart that has a joint venture with Bharti Enterprise have problems. Bharti Retail has operations in many cities that fall under the no-go zone for global retailers. (Economist, FDI in retail: Unclear sourcing norms, stand of many states make global retailers wary of India entry, November 1, 2012) Walmart is currently facing allegations of corrupt practices in India. We do acknowledge that India is a large emerging market which has a $500 billion annual retail market that is expected to swell to $1,248 billion by 2020. So it is important for companies to see if the benefits outweigh the cost and risk.
CURRENT STATE OF WALMART
Currently, Walmart is rated the 16th largest public company in the world according to Forbes, with over 10,000 retail units worldwide in 27 countries. They reported revenues of over $443 billion in FY2012 with $125 billion of that coming from its international ventures. And its international operations grew the most of all its operations last year at a rate of 15. 2 percent as seen in Exhibit A. Bharti Enterprises, on the other hand, has a major presence in India as well as international ventures in over 20 countries worldwide.
They are a conglomerate of various enterprises including telecommunications, real estate, processed foods, and retail. Their vision is to advance change and progress in every venture. They have partnered with many international corporations such as IBM, Del Monte Pacific, and now Walmart, in order to achieve their goals. In 2007, Walmart announced a joint venture with Bharti Enterprises in India to open a wholesale retail division there. They successfully opened the first BestPrice Modern Wholesale in 2009 and grew their presence to 17 stores by 2012.
According to the Walmart Stores, Inc. website, “a typical cash-and-carry store will stand between 50,000 and 100,000 square feet and sells a wide range of fresh, frozen and chilled foods, fruits and vegetables, dry groceries, personal and home care, hotel and restaurant supplies, clothing, office supplies and other general merchandise items. ” And finally, on September 7, 2012 the Indian government agreed to open the retail sector up to foreign direct investment from multiple brand retail stores like Walmart.
Walmart India’s focus is on scale, keeping costs down through relationships with large farmers and keeping the supply chain to an almost local scale. They decided to go with a wholesale, business-to-business model based on the current models of competing retailers, like Metro Cash & Carry, in India. The Indian market looks for fresh produce and reliability in availability and quality. This is what Walmart does best, and they are no stranger to the wholesale business as demonstrated by their Sam’s Club division. But they still needed to hedge their liability of foreignness.
In order to succeed in the “mom and pop” style market (known as kiranas), they needed to translate what they already knew about cost minimization and logistics to their Indian operations. And in order to better understand the consumer needs so as not to fail like some of its predecessors, Walmart did extensive research on the current operations of grocers in India, and found that the “best prices, [and] reliability in terms of availability and quality was one thing that all of [our targets] demanded,” according to Walmart’s expatriate and the expert on the cash and carry business, Arvind Mediratta (Goyal, Gupta, and Mahajan-Bansal, 2009).
As a joint venture, Walmart has had to take the necessary steps to translate their time-tested and proven strategies for success to the Indian people, and especially its young population. With more than half of India’s population below the age of 30, the young generation is a great resource for human capital. Bharti Walmart is taking advantage of this resource by investing in multiple training centers in many regions of India. Walmart is working with the state governments to build these training centers to prepare India’s youth for careers in retail.
As of 2012, they have successfully built 14 training centers in cities like Amritsar, Delhi, and Bangalore among others. And they have trained over 15,000 students with over 5400 being placed in a job after certification (Bharti Walmart, 2011). This not only creates a relationship with the local governments in India, but also creates a medium through which Walmart can distribute their culture and values to the Indian society. Along with these training centers, Walmart has also set up a Direct Farm system to source about 20% of their required produce in stores.
The system adopts local farmers and works along with them to build a lasting relationship and a constant, reliable market for their goods. Bharti Walmart even offers support groups, training classes and even better technology to Indian farmers that work with them. Farmers benefit from this system in that they have a guaranteed market for their fruits and vegetables, they work in better conditions than they would on their own, and they receive a significant increase in prices (around 7-10% more) compared to the traditional Mandi system.
This is a major improvement to the local agricultural system, while allowing Walmart better control over the hygiene and quality of its food products (Bharti Walmart, 2011).
CHALLENGES IN GERMANY AND SOUTH KOREA
Walmart failed in Germany for a number of reasons – not just because of competition from other stores, but because of the culture of the country. German people generally prefer going to smaller markets instead of huge supermarkets like Walmart. They buy fresh produce more often at small neighborhood stores.
However, Aldi, another large chain, managed to compete fairly well by providing a small selection of high quality products at very low prices. The three main things that made Germans uncomfortable were the daily chants, the forced smiles, and the discouraging of relationships between coworkers. German employees disliked the chants and exercises that Walmart requires its employees to do at the beginning of their shifts. Near the end of its time in Germany, Walmart decided to stop requiring its employees to smile at customers. In Germany, strangers rarely smile at one another and many customers were put off by the cashiers’ behavior.
Many customers mistakenly interpreted it as the emloyees flirting with them. Finally, Walmart discouraged intimate relationships between employees and required employees to file reports if they witnessed their coworkers in such relationships. German people were very uncomfortable with that – feeling like they were ratting out their fellow employees. By the time Walmart realized all this, it was too late. They tried to make the necessary changes, but they had been losing money in Germany for too long and decided that it would be best to pull out before they lost even more.
Other explanations include Germany being very “green”, which means that they wouldn’t approve of the plastic bags and wastefulness of Walmart. Germany is sometimes considered very anti-American when it comes to branding (with some exceptions, like Dunkin’ Donuts and Starbucks). When Walmart made the decision to move into South Korea, it seemed like a good idea at the time. The economy was growing, the currency was cheap, and local stores were already on shaky ground, so they wouldn’t have much competition. However, despite all that, many large companies have failed in South Korea, such as Nestle, Google, and Nokia.
Walmart was just another company to join that list. They lost hundreds of millions of dollars because they didn’t understand the culture of the country they were moving into. They failed to realize what South Korean housewives were looking for when they went shopping for groceries. In South Korea, people want very fresh food products – especially items such as fresh fish and produce. South Koreans are also dissatisfied with large, warehouse-style stores. They generally prefer smaller, more personable stores. South Koreans, in general, also have a larger work ethic and different set of standards than American citizens.
South Koreans work longer hours – they are more concerned with doing things right than they are about getting things done fast. That is another reason why they were not interested in Walmart; they don’t want low-quality goods for low prices. They would rather spend a little more money on higher quality goods. It is a different culture than America.
People are put under so much pressure all the time in Korea that when they get a break, they want to enjoy the best things – not the things with the best prices. So although it seemed like a good deal to expand Walmart into South Korea, this failure shows that you have to look at more than just numbers.
STRATEGIES TO ADAPT TO INDIAN MARKET
Seeing a company such as Wal-Mart entering a new country is nothing new for many large businesses today. Wal-Mart has had previous success stories and also a few failures while venturing away from its homeland of the US. Its major success stems from Wal-Mart being able to introduce its unique culture and retailing concept despite the changes in the culture of the society it moved into. Wal-Mart also relies on success of being able to secure its supply chain management design.
In India, one study showed that a local Indian retailer had the equivalent of 100 days sales on inventory in 2006 and had only dropped to 77 days sales in 2010, compared with Wal-Mart at an average of 29 days in 2010 (Chitra). Therefore, Wal-Mart is trying to introduce a direct link from the farmers and small manufacturers that have minimal distribution capabilities straight to the retailer, although this could really present a problem for Wal-Mart. To do this, Wal-Mart plans on creating a strong back-end structure that will allow Wal-Mart to exploit a first mover advantage.
With India’s weak infrastructure as seen in Exhibit B, including roadways, seaports, airports, and warehouses, its current unorganized or “un-modernized” retail industry which lacks largely in inventory management, and previous laws of FDI, it has been tough for any company to create a good structure. They plan to introduce technologies such as refrigerated trucks and distribution centers, which are not currently used in India’s retail distribution, and implement their inventory management program that is leading the industry.
With the lack of technology, it has led to 30-60% of food products spoiling before reaching the customers, according to Wal-Mart Stores Inc. Also, Wal-Mart will have a large advantage when connecting the producer and retailer due to Wal-Mart already purchases about $1. 6 billion US dollars worth of textiles, leathers, and others products annually from Indian producers (Asia Case Research Centre 10). The topic of Wal-Mart going for a direct connection led to many protests due to the estimated 40 million people that depended on small and medium-sized local retailing and middleman distribution channels.
With Wal-Mart and Bharti’s franchise, Bharti Wal-Mart Private Ltd, Wal-Mart would still control the supply chain operations, while the domestic store could sell products from multiple suppliers. Secondly, Bharti and Wal-Mart’s 50-50 venture for wholesale cash-and-carry operations would be the key supplier of many retail stores. This would be one of Wal-Mart’s greatest assets in linking the farmers, due to India’s laws of no direct sales to customers from non-domestic retailers that carry multiple brands.
Wal-Mart is trying to substantially increase productivity, packaging, and quality management while working with current informal and underfunded producers. All of this should lead to shorter supply chain paths leading to a better, fresher product for the consumer. Although many are protesting this will increase pollution not only due to more trucking by Wal-Mart but also more commuting for the consumer who may have been able to once have it delivered. Another change that Wal-Mart may have to face with packaging is the size of the product.
Many Indian consumers like to buy fresh, thus they do not tend to have as large emphasis on frozen bulk items and other grocery items of large bulk as well. They shop on more of a need to have basis and focus on saving money than that of the typical US consumer. This does not mean they expect any less in quality. In the past decade Indian consumers have started to get used to falling prices due to technological innovation and have been able to see that it does not have to affect quality in a negative way. This has lead to some more indulgence of the typical middle-classed Indian.
THE FUTURE OF WALMART INDIA
Wal-Mart plans to open smaller retail stores in India that are about 50,000 square feet. It is about one fifth of the size of the stores in the U. S. They say that they do not want to directly compete with the local kiraana store operators that always have the advantage of serving the customers at their doorstep. But they are going to focus on the purchases of the family, which is almost one third of the total grocery bill of an average household in India. So they have no intention of starting a home delivery business model.
Raj Jain, CEO of Wal-Mart in India has said that he expects India’s market to grow to as large as China’s. He also has said that building their supply chain efficiency is a slow and long process in a country that is as big as India’s. It took Wal-Mart about three years to build a few supply chains in the North and he expects it to take about eight to ten years before the full development of the supply chain takes place. Currently they have three distribution centers, Chandigarh, Bangalore, and Delhi. The country needs about ten to fifteen to be at optimal efficiency.
He also says that their philosophy of everyday low prices and everyday low costs will be the same. He believes service levels in India will be much better than other countries because India has the people and resources that are not as expensive everywhere else. India struggles with the checkout experience because India’s technology and back-end is not good so Wal-Mart wishes to fix that. Another big part is that Wal-Mart is known for having everything at the same place and they want to present this convenience to the Indian people because it saves people costs when you don’t have to travel to multiple locations.
There is a lot of potential in India and Wal-Mart is trying to take advantage of that (Prayag). With the Indian government allowing foreign retailers to expand their reach within India, Wal-mart is moving quickly to establish a presence in Indian states that will welcome their arrival. Wal-mart is committed to India long term because of the potential growth the Indian economy has to offer and the sheer volume of the target market (Chu). Although Wal-Mart is committed to India, they must also be cautious of where to place their retail locations and how many of these locations they have.
The amount of loyalty that Indian consumers have for mom and pop retailers will be a key metric in Wal-Mart’s ultimate decision on how many locations they will open. Wal-Mart will have an opportunity to get a piece of an industry that is expected to grow by 7. 5% annually for the next five years to reach $725 billion in total sales, so clearly the potential issues they will encounter are worth confronting (Bahree and Chu, 2012). Since Wal-Mart has no exact business model for how they plan to operate in India, there will be lots of risk involved with their investment and expansion in India because of all the unknowns that they will face.
This uncertainty means that Wal-Mart must establish core competencies for their Indian operation and establish internal controls that ensure all of their Indian locations are operating efficiently. As previously discussed in this report, Wal-Mart will encounter challenges with their supply chain, personnel, retention of customers and overall operations, but if they adopt a proactive strategy in addressing these challenges it will be easier for Wal-Mart to succeed in India.
Reference
- http://www. walmartstores. om/sites/annual-report/2012/WalMart_AR. pdf
- http://www. smart-traveler. info/map_of_tx. html http://en. wikipedia. org/wiki/File:India_roadway_map. svg
