Wal-Mart May Win in India as Carrefour, Tesco Battle Slump

India’s opening up of foreign investment in retail may see Wal-Mart Stores Inc. (WMT) be the first to tap the $505 billion market as Carrefour SA (CA) and Tesco Plc (TSCO) focus on battling falling profits and consumer spending.

Global retailers may need to invest at least $500 million over three to five years in the world’s second-most populous nation to expand retail operations across the country, said Jagannadham Thunuguntla, Delhi-based chief strategist at SMC Global Securities Ltd. (GLBS) Such investment could pose a challenge for the European retailers, which are struggling amid the region’s debt crisis.

In the biggest policy push of Prime Minister Manmohan Singh’s second term, India on Sept. 14 opened the gates for overseas retailers to enter a market that Technopak Advisors Pvt. estimates will expand 44 percent from this year to $725 billion in 2017. Wal-Mart stands to be the first beneficiary of the change, helped by its position as the biggest foreign company to offer wholesaling in partnership with local companies, according to CNI Research Ltd. (CNIR)

“Even when Tesco and Carrefour come into play, Wal-Mart will grow further,” said Kishor Ostwal, managing director at CNI Research in Mumbai. “It will take a decade’s time before you can see all other multinational brands come in and fight in India.”

Ownership Rule

Overseas companies will be allowed to take a stake of as much as 51 percent in retail stores in a local partnership, selling more than one brand of products after India’s government reversed that decision in December because of political opposition. Companies must put half of their investment in infrastructure such as processing, manufacturing, storage, warehouses and packaging.

Pantaloon Retail Ltd. (PF), the country’s largest operator of supermarkets, led gains among local retailers today on expectations they may become targets for cooperation.

“We are willing and able to invest in back-end infrastructure that will help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation,” Raj Jain, president of Wal-Mart India, said in e-mailed statement shortly after the government announcement.

Wal-Mart, based in Bentonville, Arkansas, will add three to five wholesale outlets in India this year, Kevin Gardner, a spokesman for the world’s largest retailer, said in an e-mail. He didn’t provide details of the company’s plans for retail outlets.

India offers great potential to Wal-Mart as the country is “three times the population, one third the land mass” of the U.S., Scott Price, head of the retailer’s Asia operations, said in an interview on Sept. 6. “With that density of population, these sorts of properly regulated openings will only benefit.”

International Versus Domestic

Wal-Mart’s net sales for the company’s international business rose 16 percent in the three months ended July 31, compared with a 0.4 percent increase in the U.S. The company boosted its profit forecast for the year in August after the Sam’s Club chain and changes in merchandising helped halt a decline in its U.S. store sales.

“Logistics has always been one of Wal-Mart’s great strengths and logistics is one of the great challenges in India,” said Bernie Sosnick, an analyst at Gilford Securities in Melville, New York. He recommends buying Wal-Mart shares.

A push into India isn’t likely to affect results for several years because Wal-Mart will probably do a lot of testing before a large expansion, Sosnick said.

Foreign companies are currently permitted to invest in supply chains and wholesale stores, which sell to local retailers and businesses. In January, India allowed overseas companies full ownership of stores selling a single brand.

Head Start

Wal-Mart began setting up wholesale operations through a joint venture with India’s Bharti Enterprises Pvt in 2007 and now runs 17 outlets that sell to retailers and businesses.

Carrefour, the world’s second-largest retailer, has two wholesale stores in India; Tesco, the third-largest, helps manage wholesale operations for Star Bazaar, a hypermarket for Trent Ltd., a unit of India’s Tata Group.

“Foreign market expansion is very expensive,” said Boris Planer, Frankfurt-based chief economist at Planet Retail Holdings Ltd. “You have to expect to make losses for several years and perhaps a decade. Not all retailers can afford that.”

Too Much Debt

Carrefour, which has cut its profit outlook five times in the past two years, has too much debt and costs that are too high, Chief Executive Officer Georges Plassat said in June. The executive said he needs at least three years to revive the ailing retailer as Europe’s debt crisis weighs on consumer spending and it struggles to attract shoppers to its largest stores.

Plassat, who announced job cuts in France in August, has said he will evaluate operations in markets where local competition is better placed, after agreeing to sell Carrefour’s Greek business to its local franchise partner. The retailer plans to exit Singapore, where it has two stores. A Carrefour spokesman declined to comment on its plan for India.

Tesco saw four straight quarters of sales declines while its U.S. business has yet to make a profit five years after entering the West Coast. There will be “minimal” growth in earnings this fiscal year, it said in January.

The U.K.’s largest retailer will wait to see details, such as sourcing and investment requirements, before commenting on its plans in India, Sameer Barde, Tesco’s Mumbai-based spokesman, said in a phone interview.

J Sainsbury Plc (SBRY), the third-largest U.K. grocery chain which was considering entering the India market, has no plans for international expansion in the short term, said Tom Parker, a spokesman.

High Inflation

India has been battling inflation of almost 7 percent and an economy that’s growing at close to its slowest pace in three years.

Singh’s government said it will be up to state governments to decide whether they want to adopt the new retail regulation, to ease discontent among regional leaders who have said they plan to protest the new policy on concern it will put millions of small shopkeepers out of work.

Shares Surge

Pantaloon Retail surged 19 percent at close in Mumbai trading, the most since May 2009. Shoppers Stop Ltd. (SHOP), the country’s second-largest retailer, gained 7.8 percent and Trent Ltd. (TRENT) jumped 4.7 percent. The looser rules may encourage Indian retailers to partner with international businesses for funding and expansion.

Shoppers Stop will consider teaming up with a foreign partner to expand its hypermarkets as it needs global technology, sourcing and a large amount of funding, said Managing Director Govind Shrikhande.

“Capital deployment will take a cautious route” for foreign retailers such as Carrefour and Tesco that are struggling for growth in domestic markets, said Ankur Bisen, associate vice president at Technopak Advisors.

Still, “growth exists for the next decade,” he said. “They cannot afford to lose out on the Indian market.”

To contact the reporter on this story: Malavika Sharma in New Delhi at msharma52@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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