Oct. 10 (Bloomberg) -- Wal-Mart Stores Inc.’s ambitions to open a chain of supermarkets in India hit a roadblock after the world’s largest retailer ended a six-year local partnership with billionaire Sunil Mittal.
Wal-Mart will for now have to content itself with running a chain of wholesale stores in the country until it finds a new Indian partner to open supermarkets. The Bentonville, Arkansas-based company yesterday agreed to buy the stake held by Mittal’s Bharti Enterprises Pvt. in their joint venture.
“Wal-Mart is clearly the loser here,” said Rakesh Gambhir, vice president at industry group Food & Grocery Forum India. “They will have to go back to the start and build the business on their own.”
The breakup is a setback for the retailer’s plans to expand overseas as U.S. shoppers’ reluctance to buy more than the bare necessities prompted the company in August to cut its annual profit forecast. Wal-Mart is facing troubles in India, where it’s being investigated by the government and is conducting an internal probe on possible violations of U.S. anti-corruption laws.
“A lot of the players are going to look at this breakup, as something that happened because of Wal-Mart’s internal issues,” said Harish Bijoor, founder of retail consultancy Harish Bijoor Consults Inc.
Wal-Mart will gain full control over the 20 so-called cash and carry stores and their supply chain after the transaction is completed. The U.S. retailer plans to continue to expand this business in the country, according to yesterday’s statement.
These stores supply to neighborhood shopkeepers and businesses, and the segment “has huge potential,” said Saloni Nangia, vice president at consultant Technopak Advisors Pvt.
Foreign companies need a local partner to run supermarket chains in India. Under recently relaxed rules, such retail operations will have to buy 30 percent of manufactured products from small- and medium-sized local firms with less than $2 million invested in factories and machinery. Earlier rules were even stricter, defining “small and medium” companies as those with investments of under $1 million.
Even after these changes, the entry barriers for foreign retailers “aren’t workable,” Scott Price, head of Wal-Mart’s Asia operations, said in an Oct. 5 interview. The rules still don’t provide a level playing field for international retailers compared with local rivals, he said.
Price also said that the company isn’t talking to other partners and its relationship with Bharti was “very good.” Wal-Mart yesterday declined to comment further on partnerships in an e-mailed response to questions.
The two companies also said they are discontinuing their agreement in the retail business. Bharti Retail runs a network of more than 210 large and medium-sized supermarkets in India called Easy Day.
Wal-Mart had invested 4.56 billion rupees ($74 million) in compulsory convertible debentures in a Bharti unit that controls the Easy Day stores. As part of the deal announced yesterday, Bharti will buy the debentures from Wal-Mart. The companies didn’t provide a transaction value.
The wholesale joint venture, which opened its first store in the northern city of Amritsar in May 2009, operates cash-and-carry outlets where only businesses with valid sales tax documents are allowed to shop after becoming members. Both companies own a 50 percent stake each in the venture, according to its website.
The two partners will now probably become competitors.
Bharti plans to open its own chain of wholesale stores, said two people familiar with the matter, who asked not to be identified because they are not authorized to speak to the media. Bharti, in an e-mailed statement, declined to comment.
The tie-up with the world’s biggest retailer would have given Bharti a lot of expertise in running retail chains, and the Indian company will be well placed to grow that business, Technopak’s Nangia said.
Because the Indian company now has an established retail business, other foreign retailers may be interested in partnering with it, the consultant Bijoor said.
Wal-Mart has lost top executives in India over the past year. In June, its chief executive officer of the India joint venture, Raj Jain, left the company amid government and internal investigations. His departure came seven months after the venture’s chief financial officer was suspended.
Jain will join Bharti Group as an adviser, the company said in an e-mailed statement yesterday.
An Indian government agency is investigating allegations that Wal-Mart violated rules governing foreign investment in the retail industry, Anand Sharma, minister for commerce and industry, said in December. A separate probe into allegations that Wal-Mart lobbied Indian government officials ended without any conclusions, according to a government document obtained by Bloomberg.
Reluctant to Invest
While the nation changed laws in September last year to allow foreign companies to own majority stakes in multibrand retail chains, no global retailer has sought such licenses yet. The government also eased rules covering sourcing, infrastructure investment and store location in August, in an effort to woo Wal-Mart, Tesco Plc and other global chains to open retail stores.
The reluctance of overseas companies to invest in retail operations has been a blow to the government of Prime Minister Manmohan Singh, which has battled capital outflows and a plunging currency this year.
Foreign investment “in multibrand retail is pretty much stuck now. No companies have outlined a clear plan even a year after government opened things up,” Dhvani Bavishi, an analyst at ICICI Direct, said. “Wal-Mart was expected to be the first, and now that’ll get delayed a lot.”
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