Wal-Mart In India

1. Wal-Mart In India What’s the Impact of Giant Retailers?

2. Back Ground – Key Points • India is the Second Largest Retail Market • India is Slowly Opening its Retail Sector for FDI • Huge Opportunities exist for Global Retailing Giants in India • Population > 1.1 Billion!! • GDP >~ $800 Billion in 2003 • GDP > $1.5 Trillion by 2012!! (Estimate) • Economy Growth Rate 8.2%

3. Back Ground – Retail Sector • Highly Fragmented Retail sector!! • India has 30 Million Retailers! • Retail sector is the Second Largest Employer • Organized Retail trade is $247 Billion • Unorganized Retail trade is estimated at $600+ billion

4. Retail Sector Analysis • Most Retailers are Mom-Pop operation • Large Retail Chains are few and mainly Concentrated in 6 Cities – Delhi, Mumbai, Bangalore, Kolkotta, Chennai & Hyderabad. • In addition to small retailers, there are Street Vendors, Push cart vendors • Retail sector employs about 40 Million people

5. Government Rules & Regulation Foreign Investment Promotion Board in 1997 set up rules that govern Foreign Investments in Retail Sector which categorized foreign companies into 3 broad types: • Companies that set up domestic manufacturing facilities and sold products manufactured domestically. • Companies that came in to trade prior to the 1997 norms. • Companies that came in to trade after the 1997 norms were adopted.

6. Policy Favors Domestic Manufacturing • No restrictions on the sale of products made in India. • Sony, LG, Samsung & Phillips etc, manufacture and sell products in India. • They also import and sell other high-tech products like laser printers and photocopiers etc • Provided that current manufacturing techniques and costs do not yet permit them to manufacture these items domestically. • And they undertake to do so in the near future.

7. Rules for Global Retailers • Global Retailers planning to setup shop in India need to: • Setup Wholly Owned Subsidiaries in India • Sell only to Whole Sellers • Cannot sell to Retail Customers • Whole Sellers are defined as “Government certified Whole Seller who holds a Sales Tax registration Number”

8. Regional Government Rules • In Addition to the Federal Rules, there are Local rules which govern the location & size of Retail Stores. • Retail Stores cannot be in City Centers • Land Availability conditions imply that New Mega retail stores to be setup at the outskirts of the city. • Must get permission from Local municipality or City Corporations

9. Current Scenario • German Retail Giant Metro GmbH set up operations in 2003 • Metro GmbH entry was cleared by Late Cabinet Minister for Industry and Commerce Murasoli Maran. • Metro GmbH was permitted to • Setting up of state-of-the-art cash and carry wholesale complexes • Sell only to Whole Sellers • Not permitted to have retail outlets or sell products to consumers directly.

10. Metro’s Experience • Metro GmbH was a huge success in the very first year of operation. • Metro instituted a Costco style Membership program • Has over 250,000 members in 9 months!! • Local Retailers are upset – Setting a stage for Political Backlash

11. Controversy • Local Retailers allege Metro GmbH has violated its terms of entry by: • Issuing membership cards to other businessmen and professionals like Doctors, Architects, Consultants etc. • Issued membership cards to those without a registered sales tax certificate. • Sold Items in single numbers, like in retail trade and not in large volumes like in a whole sale trade • Metro did not specify a minimum value for purchase

12. Political Battle • India had been a closed Socialist Society for last 50 years • India has a Strong & Vibrant Democracy • Year 2004 is an Election year!! • India has about 40 million people employed in retail sector, Most of them are registered voters!

13. Political Battle – Contd. • Foreign Retailers is now an Election Issue! • Federation of Associations of Maharashtra state (FAM), a state-level organization of small traders, Communist Party of India (Marxist) and Swadeshi Jagaran Manch (SJM) – wing of the ruling party are opposed to Foreign Retailers • Confederation of Indian Industry (CII) supports FAM on this issue

14. Battle Lines • FAM, SJM, CPI(M) & others have a strong political lobby – A key factor in an election year • Metro GmbH has hired former Minister for Commerce Mr. P Chidambaram as its chief consol • Final outcome will be decided in Courts • Election Results will not affect Metro

15. Learning for Wal-Mart & Others • Metro’s court case will decide on the nature of Foreign Retail business • Companies cannot afford to ignore regional governments & Political groups • Socialists might force a unionized labor • India has very liberal union laws • Federal Rules for Foreign Retailer might change – Depending on Court’s decision

16. Long Term Outlook • India is an attractive Market • Retail giants cannot afford to Ignore • Rules & Regulations will change with time to level the playing field • Wal-Mart’s “No Union” policy may be challenged • Indian Retailers will be tough competitors • Current opposition is similar to those faced by Wal-Mart in many US towns and Cities • Companies must not read too much about Metro’s woes, These are part of business environment

17. Competitive Landscape • Small retailer may look unsophisticated and cash strapped but … • Small retailers will be tough competition • Small Independent retailers are a part of Indian Culture • Have better relationships with customers • Often offer better service than giant retailers • Unorganized retail sector has hidden tax benefits (many evade taxes or pay minimum taxes)

18. Global Retailers in China • As on December 1st 2004, China will open its retail sector for foreign investment • Foreign firms can setup wholly owned distribution & retail operations – without central government approval • Any foreign wholesaler or retailer can import or export goods • Stores can be set up anywhere – but with approval from municipal government • Setting the stage for rapid domestic growth, increasing local consumption & modernization of retail sector