Wal-Mart Takes on the World - Case Study Example

WAL-MART TAKES ON THE WORLD: A CASE STUDY ANALYSIS Macroeconomic dimension India is the world’s 12th largest economy and third in Asia behind Japan and China. While agriculture accounts for less than one-fifth of GDP, nearly two-thirds of the population is dependent on agriculture for livelihood. However, there is a rapidly growing middle class with increasing spending power for consumer goods. India’s GDP in 2007 is estimated to be $2.99 trillion and with its population of 1.15 billion, its GDP per capita stood at $2,700 on PPP basis. Real growth in GDP was estimated to be 9.2 per cent after factoring in an inflation rate of 6.4 percent. In terms of national output by industry, the services sector accounted for 52.9 percent share while industry and agriculture had 29.4 per cent and 17.6 per cent respectively. These data point up the fact that more than half of the GDP was accounted for by services, and nearly a third by industry. Industrial production nevertheless grew by 8.9 per cent in 2007 Economic growth was boosted by market-oriented economic reforms that began in 1991, attracting substantial amounts of foreign direct investments. FDIs accounted for some $255 billion of foreign exchange reserves by mid 2007. With a population growth rate of 1.578 per cent per year, it is expected to overtake China (which has less than 1 per cent) in the next ten years or so. India is rated by A.T. Kearney as no. 1 in the world in terms of Global Service Location attractiveness. It is above the median in global competitiveness but is otherwise mediocre to fair in other measures or indices such as the index of economic freedom, credit risk, and corruption perceptions index. Risk assessment (according to Coface) India’s economy has been growing annually between 8 per cent and 9.4 per cent during the past 3 years, with growth mainly accounted for by the services and industry sectors. There is some risk of the economy overheating with balance of payments deficits and inflation, but otherwise it has high savings and investment rates. The economy’s strengths are its secondary (industry) and services sectors, such as IT and outsourcing; balanced economic growth driven investments, exports, and a growing middle class consumption; savings and investment rates that help corporate investments; and reasonable foreign debt level and foreign reserves. The rapidly growing software sector is boosting service exports and modernizing Indias economy. Software exports passed $28 billion in FY 2006-2007, while business process outsourcing (BPO) revenues reached $8.3 billion. Personal computer user level was 14 per 1,000 persons. The cellular/mobile market was 140 million subscribers by November 2006 and the country had 54 million cable TV customers. India’s weaknesses in its risk profile include high debt burden that preempts development spending; lack of infrastructures; rapid rise in corporate debt, and the bias of development against the rural sector. In addition, there is a cumbersome bureaucracy, corruption, some regulatory and foreign investment controls, and reservation of some key products for small scale industries. The Situation There is high potential for an expanding retail industry because of the huge size where only 3 per cent come from organized retail businesses. With increasing average income of the population and modernization, there has been some increase in the share of the organized sector. With favorable demographic trends and rising incomes of the middle class, as well as changing mindsets of Indians caused by globalization, there is a trend towards consumerism in the country. Another favorable situation is the change in government policy regarding retail business. FDI in the sector was restricted in 1997, but then a change in regulations allowed foreign retailers to set up wholly owned subsidiaries in India for the purpose of trade but they could only sell to wholesale buyers and not to end consumers. In 2006 the government announced a change in FDI policy and allowed 51 percent FDI in retail trade of single-brand products. The Cultural Aspect India is one of the largest emerging markets, and one of the largest economies in the world in terms of purchasing power and has a strong middle class base of 300 million. Around 70 per cent of the total households in India (188 million) reside in the rural areas, where mostly traditional retail outlets, commonly called kirana stores, exist. These are operated by single person and runs on the basis of consumer familiarity with the owner. It was just recently that organized retailing became more popular in big cities in India; modern organized stores have proliferated in most metropolitan and other big in India after the government policy reform on the foreign entry in the retail sector. Wal-Mart’s Internal Environment Wal-Mart is the world’s largest retailer and operates in more than 13 countries, serving more than 170 million customers through 6100 stores. Its core competency lies in its efficient and sophisticated logistics, use of information technology to track information, and its customer-centric focus and low prices. It expanded its reach to foreign countries by various modes, such as acquisition, joint ventures, and partnerships, adjusting to market conditions and constraints. It regularly procures more than $2 billion of goods from India ($18 billion from China). The Market Environment The Indian retail industry is dominated by mom-and-pop stores which account for some 97 percent of the market size of $350 billion, and only 3 per cent by the organized market. In 2007 Wal-Mart entered into a joint venture partnership with local retail powerhouse Bharti Enterprises Ltd., with the objective establishing 10 to 15 large retail stores within the next 7 years and to modernize the industry to boot. Reliance Industries Ltd. Has grocery stores, having opened 100 stores in 2007, and planning to open thousand s more in the future. Aside from Reliance, German retailer Metro AG, the world’s fourth largest retailer in terms of sales, has wholesale stores in Bangalore and Hyderabad. Up till 2004, Foreign Direct Investment (FDI) rules in the retail industry were highly restricted. Only the sectors of hi-tech industry and medical equipments were open to foreign investments, but later FDIs were allowed in cash-and-carry segment of retail trading while single-brand retailers were allowed to set up their stores in India with 51 percent foreign shareholdings. Fearing displacement by the retail giant which is planning to open its first store in late 2008, Indian farmers and traders have joined forces to set up a chain of superstores to prepare to counteract or match the low prices to be offered by WalMart when it enters the national market. In the state of Maharastra, this effort is being supported by the government authorities through infrastructure funding. Wal-Mart has been able to negotiate a partnership with a local retail firm despite the fact that the government does not allow multi-brand retail stores. This was circumvented by Wal-Mart when it agreed that Bharti handle the front-end retail operations, while Wal-Mart would handle back-end logistics, cash and carry and supply sourcing. Wal-Mart has justified its plans to open stores in India by saying that its goal is “to work with India’s existing supply-chain infrastructure and improve efficiency to minimize wastage and maximize value for farmers and manufacturers as well as retailers, “ according to WalMart Vice Chairman M. Duke. “We can help cut the waste, not the middlemen who can play an important role in the entire supply chain.” It also planned to outsource some IT work to Indian companies. Tesco and Carrefour of France had planned to set up stores in India but these plans have apparently been put in the backburner for now because of government regulations. However, the British subsidiary of Wal-Mart, Asda Group Ltd, has been in operation in India and is planning to open additional 22 stores and extend 12 existing outlets in the near future. Competitive Scenario In India, shopping for household items is usually done in small "kirana" (literally, grocery) shops. Items such as food grains, vegetables and livestock are sold unpackaged, by weight, at very cheap prices, which supermarkets would find difficult to match. Supermarkets can have an edge in selling packaged goods, which have comparatively less appeal for the majority of Indian shoppers, especially if one looks beyond urban areas. Some multi-national players in the Indian market seem to be aware of this, and have taken the wholesale route. Indian companies, who understand the mindset of the Indian shopper, compete with the small shops by going the hypermarket route, where goods are once again sold unpackaged and by weight, at wholesale prices. A new major entrant to this market is the Indian giant, Reliance Industries Ltd (RIL) which plans to enter both the supermarket and hyper-market business. They plan to open over 1,500 supermarkets and 1,000 hypermarkets across the country. Wal-Mart is also going to open both supermarkets and hyper-markets. Success Factors Analysts believe that the key success factors in Indian retail industry will be customer loyalty as well as location, value-added services, low prices, and the ability to read and adapt to shifting trends. The Bharti-Wal-Mart combination seems to be a good one in terms of synergy and promises to be a great success story. This they can accomplish if they will serve Indian consumers by creating good value and if they also support the local suppliers. REFERENCES Hill, CWL 2005, International business: Competing in the global marketplace, McGraw-Hill, New York. 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