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FEATURES/Big Bet | Oct 20, 2009 | 27359 views

Walmart's Passage to India

The world's largest retailer has found a new growth engine in the holy city of Amritsar

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efore we begin to tell this story, allow us a moment to put a few things into perspective. Walmart is the world’s second largest company after ExxonMobil. Last year, it was number one. Now, pause for a moment and ask yourself how large is large really? Large is when your revenues are in the region of $406 billion and you are six times larger than Proctor & Gamble, the largest consumer products company in the world. Large is when those revenues are more than the GDP of at least 144 nations.

Large is when you need at least $8 billion in additional revenues to grow by two percent each year.
When a system is built on the back of this kind of numbers, the people running it are difficult to please and equally difficult to impress. But one July morning this year, Doug McMillon, was mighty pleased and mighty impressed. The CEO of Walmart’s international operation was visiting his newest baby — a large, month-old store on the fabled Grand Trunk Road just outside Amritsar in Punjab.

Big Volume Drivers are pulses and grains which sell in large quantity packs
Image: Madhu Kapparath for Forbes India
Big Volume Drivers are pulses and grains which sell in large quantity packs
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Set up in a joint venture with Sunil Mittal’s Bharti Group and called Best Price Modern Wholesale, bean counters at the store told him they had signed on close to 35,000 members in the first couple of weeks (which has since ballooned to 70,000). They included small kirana shop owners, hotels, restaurants, schools, colleges, the police force and even the Indian Army. Sales, they told him, exceeded expectations by almost 70 percent. And that the profits being generated were large enough to cover even depreciation. Their only concern was whether stocks could cope with demand.

McMillon blinked. After 18 years at Walmart, he knew the company is pretty damn good — actually, the best — when it comes to retailing. But it had never attempted a pure wholesale format anywhere in the world, including in the US. If anything, it has only played with hybrid models like Sam’s Club that caters to both bulk buyers and retail shoppers. The closest it had come to making a format like this work was something called Maxi in Mexico. But that wasn’t a pure business-to-business model. Even homemakers could shop there.

For the first time, McMillon figured, Walmart was looking at a model that held out a few promises. One, if scaled up, it could easily feed a billion dollars into Walmart’s insatiable appetite over the next five years. Two, if the model be replicated in other emerging markets across the world, God alone knows how many billion dollars the company could walk away with.

Shortly after he concluded his visit to the store, an effusive McMillon told CNBC-TV18, “Our investments in India are really not constrained from a financial perspective. The constraint is more about how many cash and carry units can you get to open from a real estate perspective.”

What he really meant was that Walmart is ready with a $5 billion plus war chest for its international business and it is up to India to use as much of it as it can. And that if the Indian team, headed by former Unilever executive Raj Jain, can find enough land to set up more stores of the kind operating in Amritsar, he can double the stakes. “We will roll it out rapidly,” says Jain. The plan is to set up 15 — maybe more — of such stores across the country in the next two years.

Serendipity
Sure, there is a school of thought that argues Walmart is among the last of its kind to latch on to the great Indian dream. Home-grown businesses like the Future Group have more than a decade’s head start. Others like Reliance and A.V. Birla have learnt from their mistakes and are now looking to regroup their strategies.

But honestly, that is missing the trees for the woods. All of them cater to a $20 billion organised retail opportunity. The cash and carry opportunity is a much larger, $400 billion opportunity, now dominated by the unorganised wholesalers who supply to local kirana stores. The only one who tried was Germany’s Metro — the world’s largest wholesale operation. But it never quite figured India out.
It isn’t that Walmart was clueless of the India opportunity. After China, this is the only country where it sees enough potential to plant at least 1,000 stores. But there are regulatory issues. Indian law prevents foreign retailers from selling directly to consumers. If they intend to take the wholesale route though, they’re welcome to open shop. But Walmart had a lot of thinking to do before it took the plunge.

Two decades after stepping out of the US, it remains a quintessential American company. It understands American consumers well, but is ill at ease in most emerging markets. Professor Anil Gupta, who has tracked Walmart’s progress around the world teaches strategy at the University of Michigan says, “I spoke with senior executives from Walmart a couple of years ago wanting to find out how global the company’s mindset is. I had an instrument to do this. They said don’t give it to us. Our global mindset is below zero — we are a US company doing business abroad and not a global company.”

But under its current CEO Mike Duke, Walmart has made big strides outside the US. In 2007, more than 50 percent of Walmart’s assets were outside the US. “Walmart’s future is clearly outside the United States,” says Gupta.

And finally, its experience in other parts of the world was patchy. In Mexico, when it started out in 1991, it set up a huge American style parking lot outside its discount store. Until its managers realised customers came in buses, not cars. And that there are no takers for golf balls in a low-income country. In time though, they recovered and are now very successful there.

This article appeared in the Forbes India magazine issue of 23 October, 2009
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Comments (1)
Lokesh Mar 15, 2010
Great article on a great issue. Walmart & Bharti enter in the market which was untouched before. Wholesale market 20 times bigger than retail market where every company is entering.
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