After a long lull, one can finally see some action at Walmart’s India headquarter. But that action seems pretty lackadaisical by Walmart’s standards... Is everything alright? by Savreen Gadhoke
Walmart had entered Germany in 1997 through two acquisitions – Wertkauf Stores (which had 21 stores) and Spar (a chain of 74 hypermarkets). The acquisition of Spar was considered to be a nastily hasty decision as it was one of the weakest German players targeted at low-income groups. Walmart had a self-inflicted hard time providing ‘everyday low prices’ and failed miserably while competing with cost leaders Aldi and Lidl that gave superior price cuts and discounts as compared to Walmart. And we haven’t even come to the retailer’s inability to understand cultural nuances. This coupled with the lack of a strong leadership, and Walmart Germany became a case study for what not to do when you enter a new market. As a result, in four years of their operations, Walmart Germany changed its CEOs four times. Walmart had to eventually pull out of the country in 2006 after selling off its 85 stores to Metro at a massive loss of $1 billion.
Raj Jain, the President & CEO, Walmart India knows these details too well. A closer look at Walmart’s India operations and the caution being displayed by the giant comes out too clear. After having committed $100 million for the expansion of C&C stores across India, Walmart (or rather, Bharti-Walmart) launched only their second store in Zirakpur (near Chandigarh) on April 14, 2010. The launch of the second store comes almost a year after the start of its first such store (branded as ‘Best Price Modern Wholesale’) in Amritsar in May 2009. Two years for two stores? Is this the Walmart we know? Yes, they do confirm they’re planning to launch seven more by this year end. But the mantra behind the success of Walmart in any part of the world has been in achieving economies of scale, i.e. cost advantages achieved by expansion. And with seven stores, it’s anybody’s guess how Bharti Walmart believes it can really achieve economies of scale in India?
More critical is the fact that logistics in a country like India, where different regions specialise in producing different specific commodities, can be a cost efficient exercise only when the expansion plan takes into account the major cash and carry (C&C) purchase belts of India. Till now, it seems Bharti Walmart is satisfied to restrict its operations to just North India and remain a regional player. Even if our prognosis turns out to be wrong in the future – given the promised seven new outlets – the government’s latest decision to cap sales by C&C players to their group front-end companies at 25% of overall sales would put paid to any overly enthusiastic growth strategies the company might have been nurturing.
As per KPMG, this government move can force these wholesalers (like Bharti Walmart) to reduce investment plans by around Rs.8 billion in the immediate term. At the same time, experts like Ashish Sehgal, Executive Director, Infoline, feel that Bharti Walmart need not expand fast as it’s based on a long-term sustainability model. As per Ashish, economies of scale are not achieved solely by expansion but by other factors too like demand, huge customer base, cost control, et al, which are conducive for doing business.
Walmart had entered Germany in 1997 through two acquisitions – Wertkauf Stores (which had 21 stores) and Spar (a chain of 74 hypermarkets). The acquisition of Spar was considered to be a nastily hasty decision as it was one of the weakest German players targeted at low-income groups. Walmart had a self-inflicted hard time providing ‘everyday low prices’ and failed miserably while competing with cost leaders Aldi and Lidl that gave superior price cuts and discounts as compared to Walmart. And we haven’t even come to the retailer’s inability to understand cultural nuances. This coupled with the lack of a strong leadership, and Walmart Germany became a case study for what not to do when you enter a new market. As a result, in four years of their operations, Walmart Germany changed its CEOs four times. Walmart had to eventually pull out of the country in 2006 after selling off its 85 stores to Metro at a massive loss of $1 billion.
Raj Jain, the President & CEO, Walmart India knows these details too well. A closer look at Walmart’s India operations and the caution being displayed by the giant comes out too clear. After having committed $100 million for the expansion of C&C stores across India, Walmart (or rather, Bharti-Walmart) launched only their second store in Zirakpur (near Chandigarh) on April 14, 2010. The launch of the second store comes almost a year after the start of its first such store (branded as ‘Best Price Modern Wholesale’) in Amritsar in May 2009. Two years for two stores? Is this the Walmart we know? Yes, they do confirm they’re planning to launch seven more by this year end. But the mantra behind the success of Walmart in any part of the world has been in achieving economies of scale, i.e. cost advantages achieved by expansion. And with seven stores, it’s anybody’s guess how Bharti Walmart believes it can really achieve economies of scale in India?
More critical is the fact that logistics in a country like India, where different regions specialise in producing different specific commodities, can be a cost efficient exercise only when the expansion plan takes into account the major cash and carry (C&C) purchase belts of India. Till now, it seems Bharti Walmart is satisfied to restrict its operations to just North India and remain a regional player. Even if our prognosis turns out to be wrong in the future – given the promised seven new outlets – the government’s latest decision to cap sales by C&C players to their group front-end companies at 25% of overall sales would put paid to any overly enthusiastic growth strategies the company might have been nurturing.
As per KPMG, this government move can force these wholesalers (like Bharti Walmart) to reduce investment plans by around Rs.8 billion in the immediate term. At the same time, experts like Ashish Sehgal, Executive Director, Infoline, feel that Bharti Walmart need not expand fast as it’s based on a long-term sustainability model. As per Ashish, economies of scale are not achieved solely by expansion but by other factors too like demand, huge customer base, cost control, et al, which are conducive for doing business.
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Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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