Nov. 1 – Wal-Mart announced plans this month to rebalance its portfolio of retail stores in Asia following poorer-than-expected results among its Indian locations.
The retailer, which entered the Indian market through a joint venture with Bharti Enterprises, has decided to suspend its operations in the country due to restrictive government regulations, which required the company to procure 30 percent of its products from small and medium domestic producers.
“For Wal-Mart, there has been frustration brewing for a long time about the obstacles to doing business in India and the changing configurations of what it could do and what it couldn’t do,” said Devangshu Dutta, chief executive of the Bangalore-based retail consultancy firm Third Eyesight.
According to a representative with Wal-Mart, the company was unable to adequately source the required quota of locally produced goods as the SMEs where unable to meet the demand required by Wal-Mart’s wholesale approach. The Indian government has also called into question a Wal-Mart-issued loan for US$100 million given to Bharti Enterprises, which might have violated the countries foreign investment rules.
Despite its setbacks in India, Wal-Mart has continued to prosper in the Chinese market and recently released plans to open an additional 110 retail stores in the country by 2016. The company has also profited from its new e-commerce business in China, which saw sales grow by 30 percent during the first two quarters of 2013.
In the battle to attract foreign retail investment, China has outplayed India thanks to greater consistency and clearness of its foreign direct investment regulations. Currently, international retail chains represent only four percent of India’s total retail market, while the share in China is closer to 20 percent.
“China has a more open investing environment than India… They know what they are allowed to invest in and those policies stay constant,” said IHS’s Chief Asia-Pacific Economist Rajiv Biswas. “Wal-Mart’s decision reflects the very different regulatory environment for foreign direct investment in the retail sector in China compared to India.”
Currently, India allows 100 percent FDI in single-brand retail, with foreign investment over 49 percent having to receive prior approval by the Foreign Investment Promotion Board. In an attempt to spark greater investment in its retail sector, the Indian government has also eased regulations governing multi-brand retail. Restrictions such as those faced by Wal-Mart, however, have continued to make India a difficult proposition for foreign retail chains.
“The policy will need a fair amount of tweaking. Retailers are unlikely to come in with the existing policy. It is very likely that post-elections, retailers might approach the government again to seek more clarity on the existing policy,” said Vivek Gupta of BMR Advisors.
Wal-Mart representatives, following the dissolution of their joint venture, have stated they still hope to maintain a presence in India in the future if the government clarifies and simplifies their FDI and retail regulations.
“We think there is a role for Wal-Mart to play [in India], but what it requires is the ability for us to invest in a manner that is simple, that we can comply with the law and we can make shareholder returns,” said Wal-Mart Asia’s CEO Scott Price.
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