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October 11, 2013

Walmart Delays Plans to Enter Indian Retail Market

by Anjana Pasricha

After waiting for years to open superstores in India, the world’s biggest retailer, Walmart, has split with its Indian partner, delaying its ambitious plans to expand in the country. India opened the door for foreign retailers last year, but tough regulations are proving to be a deterrent, and virtually no foreign chains have come forward to invest in the country’s $400 billion retail sector so far.

After parting ways with its Indian partner, Bharti Enterprises, this week, Walmart said it will continue to run the 20 wholesale stores that the two companies operated jointly.  

Although it has not "packed its bags," (left the region,) the announcement indicated that the global retailer’s plans to open large supermarkets to sell directly to consumers in India have been put on hold.

That is because foreign companies cannot open retail stores without an Indian partner, although they can own wholesale businesses.
 
Walmart was the most enthusiastic about the massive potential in India, where the retail business is dominated by "mom and pop" (small, privately owned) stores. It was expected to be the first to crack the market after the government opened the sector to overseas investors last year.   

But a year on, there are virtually no takers in the supermarket sector.   

Retail analysts say Walmart and other foreign investors have been discouraged by stringent entry conditions imposed on overseas retailers. The government imposed these to make the liberalization measure, which has sparked fierce opposition, more politically palatable.  

Devangshu Dutta, head of retail consultancy Third Eyesight, cites one example of the kind of measures that are putting off investors: a rule that requires them to source 30 percent of their products from small and midsized Indian businesses.

“If you look at Walmart’s overall sourcing mix, a very large chunk of manufacturing happens in China and other Asian markets. India is growing, but it is quite a small fraction of their sourcing, which means they would need to take the time and effort to develop the Indian supply base to their standard," said Dutta. "That takes time and it’s a dampener if you are looking at a quick start.”

Walmart’s Asia Chief Executive Scott Price has also cited the sourcing rule as a “critical stumbling block.”
 
By opening up the retail sector, the government was hoping to attract billions of dollars in foreign investments to shore up India’s faltering economy.

But the head of the Retailers Association of India, Kumar Rajagopalan, said “too many clauses” are hampering such investment.

“That is putting in too many spokes in the wheel. Many of the retailers from overseas come in and see that there are 48 licenses to take in India. They don't know how to handle so many licenses, how to take care of so many compliances,” stated Rajagopalan.  

Analysts also said foreign retailers will probably wait until after India’s elections, scheduled to be held by next May, before making a decision on investing in the country. That is because the entry of overseas chains continues to be a politically charged subject, and there are worries about how any change in government may impact India’s retail policy.