Retail Opportunities And Challenges In India: The Case Of Walmart

Retail Opportunities And Challenges In India: The Case Of Walmart

by ManMohan Sodhi and Christopher Tang

In September 2012, the Indian government announced that it would allow foreign firms to take a majority stake in multi-brand retail stores. The opening of India, an emerging economy with a rapidly growing urban middle class, should cause retailers to start salivating. But along with the potential huge opportunity are challenges not only by way of opposition from "middlemen" and small "mom-and-pop" retailers, but also by way of the current state of existing supply chains and infrastructure.

Consider the case of Walmart, among the first retailers to announce plans to sell directly to consumers (within 12 to 18 months of the announcement). The company already runs the "Best Price Modern Wholesale" stores as a joint venture with India-based Bharti as a Business-to-Business, cash-and-carry wholesale format serving small businesses (including the "mom-and-pop" retailers), so it is already learning first-hand about the supply-chain challenges and small retailers.

However, there are two underlying challenges associated with this new venture. First, under the reforms, foreign retailers must source at least 30% of their goods from local, small industries. This requirement is easily met for agricultural produce. However, about 80% of Indian farmers are smallholders with less than 2 hectares of farmland. So Walmart has to source from hundreds of thousands (even millions) of these farmers. Couple that with the inadequate transportation infrastructure in rural India, and you have a supply chain nightmare even for a supply-chain-savvy company like Walmart.

Second, as reported by the World Bank in 2011, most Indian farmers are poor (earning less than the equivalent of two U.S. dollars per day) and have limited access to credit and loans, best farming practices, reliable market information, and efficient sales channels, not to mention other obstacles such as access to water and roads. Consequently, Indian farmers' yields for many agricultural commodities are much lower than farmers in other emerging economies such as China.

Walmart's solution to these two challenges is the "direct farm" program that it has already implemented for its B2B joint venture with Bharti; they are investing in farmers to help them improve quality and yield and are buying directly from them when possible to aggregate purchases from just a few villages. Specifically, Walmart selects suitable plots of land that are suitable for different types of crops (to increase flexibility), selects farmers within the same proximity (to reduce logistics costs), and invests in farming techniques (modern irrigation systems, seeds, fertilizers, etc.). The idea is that Walmart gives requirements to farmers and purchases directly at a small premium above the prevailing prices from them, thus bypassing middlemen. Currently, Walmart has signed up 6,700 farmers for the direct farm program in India and it plans to scale up this operation to 35,000 by 2015 (see, here).

But even here there is a challenge: other well established domestic retailers like Mother Dairy and Reliance have their own "direct farm" programs, and on occasion can and do offer better prices than Walmart while having their own purchase requirements that are different from Walmart.

And in a large, but densely populated country like India, especially in the urban areas, where is there land to create Walmart's big-box stores that cover a hundred times more square feet than a typical Indian retailer? Real estate prices in India have shot up many-fold in urban areas (and in rural areas near cities) in recent years, making it expensive to create a store of that size even for a leading foreign retailer.

So will Walmart try the smaller Walmart Express format in India along with its existing B2B wholesale stores? Will its direct farm program take off in India? Will the "middlemen" and small retailers keep quiet? Will Indian consumers, even in urban areas, flock to Walmart's big-box stores or even its Express stores? Time will tell…

 

Consider the case of Walmart, among the first retailers to announce plans to sell directly to consumers (within 12 to 18 months of the announcement). The company already runs the "Best Price Modern Wholesale" stores as a joint venture with India-based Bharti as a Business-to-Business, cash-and-carry wholesale format serving small businesses (including the "mom-and-pop" retailers), so it is already learning first-hand about the supply-chain challenges and small retailers.

However, there are two underlying challenges associated with this new venture. First, under the reforms, foreign retailers must source at least 30% of their goods from local, small industries. This requirement is easily met for agricultural produce. However, about 80% of Indian farmers are smallholders with less than 2 hectares of farmland. So Walmart has to source from hundreds of thousands (even millions) of these farmers. Couple that with the inadequate transportation infrastructure in rural India, and you have a supply chain nightmare even for a supply-chain-savvy company like Walmart.

Second, as reported by the World Bank in 2011, most Indian farmers are poor (earning less than the equivalent of two U.S. dollars per day) and have limited access to credit and loans, best farming practices, reliable market information, and efficient sales channels, not to mention other obstacles such as access to water and roads. Consequently, Indian farmers' yields for many agricultural commodities are much lower than farmers in other emerging economies such as China.

Walmart's solution to these two challenges is the "direct farm" program that it has already implemented for its B2B joint venture with Bharti; they are investing in farmers to help them improve quality and yield and are buying directly from them when possible to aggregate purchases from just a few villages. Specifically, Walmart selects suitable plots of land that are suitable for different types of crops (to increase flexibility), selects farmers within the same proximity (to reduce logistics costs), and invests in farming techniques (modern irrigation systems, seeds, fertilizers, etc.). The idea is that Walmart gives requirements to farmers and purchases directly at a small premium above the prevailing prices from them, thus bypassing middlemen. Currently, Walmart has signed up 6,700 farmers for the direct farm program in India and it plans to scale up this operation to 35,000 by 2015 (see, here).

But even here there is a challenge: other well established domestic retailers like Mother Dairy and Reliance have their own "direct farm" programs, and on occasion can and do offer better prices than Walmart while having their own purchase requirements that are different from Walmart.

And in a large, but densely populated country like India, especially in the urban areas, where is there land to create Walmart's big-box stores that cover a hundred times more square feet than a typical Indian retailer? Real estate prices in India have shot up many-fold in urban areas (and in rural areas near cities) in recent years, making it expensive to create a store of that size even for a leading foreign retailer.

So will Walmart try the smaller Walmart Express format in India along with its existing B2B wholesale stores? Will its direct farm program take off in India? Will the "middlemen" and small retailers keep quiet? Will Indian consumers, even in urban areas, flock to Walmart's big-box stores or even its Express stores? Time will tell…