The Walmart – Bharti Fiasco : An Indian Story

By Anahat Danewalia

So Walmart Stores Inc ended its tryst with Bharti Enterprises this Wednesday. 6 years of political drama, national debate, protests and counter-protests, and it turns out all was in vain. Or was it? Now that Walmart has divorced Bharti, taking with it a lucrative network of 20 wholesale stores-where 100% FDI is allowed- hailed by many as the next ‘Big’ model, Bharti has been left saddled with more than 200, mostly bleeding, retail stores and a Rs. 1000 crore compensation. India, with its new Policies and Hall of Shame, is looking forward to an alliance with British retail giant, Tesco. Is another Bharti-Walmart fiasco on the cards? Let’s first take a look at what went wrong.

1. The Money:  Walmart, when it arrived in India was hoping for some major structural and institutional reforms to support its future plans. The UPA Government, to its credit, eased overseas investment rules for the FDI sector amidst major backlash, to finally get 51% multi-brand retail sector opened to FDI. However, such high cost ventures which seek to change the very law and structure of the land require major money; especially in a country like ours where grease-palming is the norm. This, while Walmart’s India partner , the Sunil Mittal promoted  Bharti Enterprises’ flagship Bharti Airtel recorded a debt of $12 million and  its 14^th consecutive month of declining profit this June while maintaining its policy of investing $2.5 billion in their businesses annually. Rising costs and dwindling pockets do not make the ideal foundation for such an ambitious venture. Trouble had to brew.
2. The Retail Sector: Retail as such, provides low margins and high costs; wholesale being a much more lucrative business. Reliance Retail, for example, recorded its first profits in 2013 since being set up in 2006. Bharti-Walmart themselves recorded a loss of Rs. 277 crore in 2011. Most big retailers initially do loose big money. However, with 1.2 billion people and 90 per cent of its $500 billion in retail trade done at mom-and-pop shops, India is potentially lucrative for global retailers. Market leaders are expected to record revenues exceeding $5 billion by 2017.
3. Policy Uncertainty: In September 2012, the government announced that it would allow foreign supermarket chains to take majority ownership of their local operations. With the changed policy norms, the biggest stumbling block for Bharti-Walmart now was the government stipulation of sourcing 30% products locally. This remains a major hurdle towards realizing actual profits in such a low margin market. The fact that despite reforms, no global supermarket chain has as yet applied verifies the encumbering regulatory uncertainty.
4. Political Uncertainty: India stood witness to the agitated protests of the BJP against the legalization of 51% multi-brand retails in September last year. Now with general elections scheduled for May 2014 and the Modi-led BJP gaining momentum, there is high risk that a BJP led Government could reverse the controversial retail reform. Moreover, if a retailer has to take permission from every state with the uncertainty of change in regime after the next elections, complications are bound to occur.
5. Bribery Scandal: Probably the game changer was the bribery scandal that irreversibly scarred and soured Bharti-Walmart relations. After the US FCPA violations involving Walmart in Mexico last year and amidst the FDI policy reforms in India, Walmart India found itself in the midst of an internal probe to check possible violations of the anti-bribery act. Not surprising, for us mango people of India; but Horror of all horrors, things were found amiss here! In November last year, Walmart suspended its CFO and the legal team as part of the probe. In December, Walmart’s disclosure with the U.S. Senate that it had spent close to $ 25 million since 2008 on its varying lobbying activities, including issues related to ‘enhanced market access for investment in India’, created a furore and forced the Government to start an enquiry. That grease-palming is a part and parcel of India’s work culture is our biggest dirty secret, and now, it’s out in the open
6. Operational Issues:  Walmart hasn’t seen eye-to-eye with Bharti ever since the Bribery Scandal. Bharti Ent. Could neither accept the disregard with which Walmart dismissed its employees (including Raj Jain whom it recently recruited as its ‘advisory member’) nor were they happy about the freeze in the expansion of the Best Price wholesale and Easyday retail stores. As talks stalled, operational issues proliferated.

Bharti Airtel is now looking at consolidating its balance sheet. Bharti Enterprises will continue its Easyday Stores but shall expand them at its own leisure while starting its own cash-and-carry business. Tesco, currently partnering with Tata Group’s Star Bazaar maintains an India Friendly Policy. Diwali is around the corner and as thousands of shoppers flock the markets, it’s the ideal time for our Big Phoren Investors to make a quick buck. However, unless the Government addresses issues like state permission and high initial investment in back-end infrastructure, there wouldn’t be any investments in multi-brand retail. Without appropriate changes, it’s just going to be many more Phoren Diwalas during Indian Diwalis!

Currently pursuing Economics Honors at Shri Ram College Of Commerce with a penchant for anything involving World History, Corporate Finance and Economics, the author is a voracious reader, Classical Dancer (Kuchipudi and Bharatnayam), avid Debator and a National-level Swimmer. I like to explore my potential to the fullest. Currently, I’m actively involved with various NGO’s like Child Rights and You, Nanhi Chaan etc. You can contact me at anahat.srcc@gmail.com