Companies like Walmart have been waiting to get into the Indian market and this gives them access to the organised sector in India.
After years of dithering and a false start in 2011, the government finally notified the rules for FDI in multi-brand retail. Companies like Walmart have been waiting to get into the Indian market and this gives them access to the organised sector in India. Scott Price, the CEO of Walmart Asia tells CNBC-TV18 about the company's plan for the Indian markets.
Note: This piece was originally published on Oct 1, 2012
Here is the edited transcript of the interview on CNBC-TV18.
Q: Let me start by asking you about a comment that you made and you said this idea that the gates have been opened and thus, there is going to be a flood of investment is over what? Do you believe that the fact about a deluge of dollars and a queue of foreign retailers is a bit overstated?
A: No, I think that the market is very interesting. But, it is really interesting in the long-term when we open stores. We open stores for 20 and 30 years and we have obviously been very interested in the opportunity to come to India in retail. After 5 years in India, we have 17 cash-and-carry wholesale stores.
The point I was making is that many foreign retailers are seeing opportunity to invest in India, but that it will take years to build a significant scale of stores in a country as large and certainly, as geographically diverse as India.
Q: I know Walmart is used to dealing with countries that have restrictions, but how restrictive is it going to be for someone like you to operate in the Indian market? You have got the 30 percent domestic sourcing requirement. You are only going to be able to operate in about 53 cities as of today. How restrictive does this make the playing field for you?
A: We are really pleased by this initial step in FDI. I think that the conditions are certainly a compromise to ensure that many of the assumptions about modern retail and foreign direct investment in modern retail can be proven. For Walmart, obviously, the backend investment is an area where we have a lot of experience.
If I look at other developing markets like China, Brazil, or Mexico, we have significant ability to deliver. Some of the conditions that the government sees as an upside opportunity like reducing food wastage, to drive a higher level of efficiency in supply chain and importantly also to create employment, to improve the livelihood of farmers, are areas in which we have the experience of investing in developing markets in other parts of the world.
Q: You have said and your colleague here in India, Raj Jain, also speaking with me did say that the earliest we could perhaps see a Walmart store open in India is about 18-24 months. Would that be a safe estimate in terms of a timeline? I know you don't have a blueprint in terms of your store rollout here, but give me a sense of what we are talking about? Are you looking at a mix between big-box stores, as well as a neighbourhood format? What would really work for you in India?
A: I think the first step that we obviously have to go through is to meet the state approval requirement. Going for FDI means that in each state that has a city with a population greater than 10 lakhs, we have to go through the approval process. I think what Raj was referring to was that generally the pipeline for modern retail takes anywhere between 12 and 24 months depending upon the size of the box.
In terms of format size, in terms of the specifics it is still a bit premature to start talking about those levels of detail.
Q: The rules are now being notified. When do you start seeking approval from the state governments that are onboard and my second question to you in terms of your current joint venture with Bharti is that for the cash-and-carry part of the business, should we expect this to naturally carry forward to the frontend as well?
A: First, when we talk about the cash-and-carry in wholesale we are very pleased with that joint venture today, in our partnership with Bharti. The fact is that we have really built a very solid business that provides to the kiranas. We expect to grow it. We expect to expand it.
I see decades of peaceful co-existence as it were between kiranas and larger more modern retail boxes. It is a very different service proposition, a very different assortment in price. In terms of next steps, I think that that the rules are clear. We will begin the process now of seeking approval state-by-state and then from there begin to design what we see as being the natural backend investment that would support the level of frontend retail that has been allowed.
Q: What about your arrangement with Bharti because your current joint venture (JV) for the cash-and-carry side of the business? As far as the front end is concerned when do you hope to sort the details for that joint venture and is it going to be Bharti? You have said you are not in talks with anybody else and the successful joint venture partnership that you have enjoyed with Bharti would probably be a logical extension to the frontend as well?
A: We are very pleased with the JV that we have with Bharti and we continue to see the opportunity to build on that. It is a natural progression. In terms of changes to the JV structure and obviously some of the conditions on FDI, it puts a level responsibility on the foreign direct investor in terms of the backend. We have to work through those details. But, overall we are very pleased with where we are in terms of the relationship with Bharti today.
Q: By when do you hope to be able to sort out those changes that you do need to make for your JV with Bharti because I am guessing that you will have to do all of that before you actually start applying for state government approval?
A: I think in the natural course of companies, in terms of negotiations there are obviously legal aspects etc. I don't think it is going to be a very arduous process. I would hope in the coming weeks, maybe couple of months, we would have the details ironed out and would be able to work through the next steps.
Q: Let me understand this clearly, so you don't need to first workout your equation, your JV with Bharti before you start applying to various state governments for approval?
A: There is a logical process. There is a requirement for a plan to be put together. Then it would be taken to the department of industrial policy and promotion (DIPP) and from there the approvals of the states can be sought.
We are working through those details now to understand the implications of timeline etc. We are interested in coming to India for a long-term investment. We see huge opportunity to improve the lives of our customers, to offer employment, to invest in the backend and so we will invest the amount of time upfront to ensure that we have quality understanding with our partners, the government and the timeline around it. We will go though a methodical process.
Q: In terms of creating the supply chain and you have been able to create a supply chain as far as cash-and-carry side of the business is concerned, incrementally what more will you need to do and how much more will you need to invest in the backend now that you have actually got approvals for the frontend?
A: In terms of the backend investment, wholesale is a very different backend than retail. The wholesale is far more oriented towards bulk. Actually the retail backend is an entirely different structure.
If I were to look at some of the areas where I would want to see improvements in terms of where we would put investment, it would probably be around cold chain, the ability to move perishable products from distribution centres straight into stores through the heat of summer.
We would want to ensure that we have very high quality distribution centres for perishables that have farmers directly providing. So I see a lot of opportunity to invest in supply chains through cold chains as the first point.
Q: Could you give me a ballpark if you could in terms of the investments that have already been made into the backend infrastructure and what we are likely to see Walmart do in terms of setting up the supply chain for the frontend?
A: In terms of retail, from here we will create business structure and there is a one hundred million dollar requirement within three years. In terms of how that investment will be made and in what areas, we are still early in this process. I am not in a position to talk in detail yet.
Q: In terms of sourcing because they made it mandatory for you to source 30 percent from small and medium enterprises in India, how hard is that going to be? Is that a bit of a worry and a big challenge? How much have you already sourced from India?
A: If you were to look at Walmart operations in developing markets around the world like Brazil, China, Mexico, more than 90% of what is sold is actually sourced locally. I don't foresee a big challenge in terms of the ability to source locally in India.
Quite honestly, if you look at our cash and carry today, that is very much local, more than 90% is sourced in India. The definitions of SME have now been made clear for what has been announced. We will begin to look for much more, like we do for every other market. Opportunities now begin to develop supplier relationship.
We obviously have core rules in terms of compliance to manufacturing capabilities, to ensure that the labour is treated well in factories, ensuring food safety and similar sort of things that we are very clear on globally are beginning to be implemented in India. We are also beginning the supplier development of SMEs.
Q: The opposition here in India and the concerns raised have been that this is going to be anti-farmers, this is going to be anti-kirana stores and this is going to actually lead to unemployment. You have just said that you see decades of peaceful co-existence for companies like Walmart with the kirana store in India, but if you were to take on these arguments and give us a sense of just what has been the benefit accrued to farmers, for instance in India since you started your cash-and-carry business or in other emerging developing markets like Mexico, Brazil where Walmart is operating? Give us a sense of just how the local farmer and the local retailers are benefited from the Walmart experience?
A: It is similar to the Direct Farm Programme that we have in China, which is obviously very large given the size of our business in China. I am confident that we will have the same experience in India. On the cash-and-carry side, we have 17 wholesale units today and the absolute number of farmers that we engage with is actually quite small, but we go direct with those farmers.
I have been to some of our cash-and-carries and had an opportunity to meet with some of the farmers and we have the programme by which we train. We train to ensure that the farmers are able to improve the productivity. We remove the middle-man so that they are getting the full margin for what they are selling. There is no wastage relative to the normal supply chains. So in our experience the incomes of farmers will go up, it will not go down and in fact, that is one of the areas of our corporate social responsibility that we see is very important in developing markets.
We have Direct Farm Programmes in Central America, Mexico, Brazil, China and they have all been very successful. In terms of kiranas, as I have said earlier, we see there is an opportunity through the cash-and-carry to continue to help kiranas buy better products, to improve their in stock rates which has been an issue for kiranas who have to rely upon multitudes of deliveries every single day, every week to be able to stock their shelves.
Whereas, if they buy through one of our cash-and-carries, they have a one stop solution to fulfil their needs. We are going to invest heavily continuing to drive the growth of the cash-and-carry channel. To me, inherent in that is our commitment that we are aware kiranas will continue to thrive in India.
Q: In terms of the challenges and the hurdles in India, infrastructure clearly is a big bottleneck and retailers like you will in a sense rally had to start from scratch and build the infrastructure, cold storages, warehouses so on and so forth. But outside of that, especially as you look at setting up retail space, land is a critical issue. How are you planning to deal with that and is it largely going to be a land that you lease or are you intending to buy land. What is the picture going to look like?
A; We generally have a flexible approach. For us, our key mission is to ensure that when we open a store we have the ability to fulfil the mission of the customers in their trade area, being able to save money.
What that means is one needs to have the right economics around the store in terms of the size of the store, in terms of the layout of the store. But, the land is at a premium in India. In comparison to the United States, India has three times the population and 1/4th of the land mass. As a result, there is a level of population density for whom simply supply and demand means that every business needs to be quite focused upon the impact of real estate. I do not see it as a major obstacle.
Certainly, as we have looked at our cash-and-carry and our growth there, we have both lease and land purchases as an option as we go into retail. We will continue to transfer the best practices from around the world on what we know works for retail and we will apply those here.
Q: You are saying that you will adopt the lease as well as purchase approach as far as real estate is concerned and you don't really see that as a big challenge. What to your mind then is the biggest challenge for you as you start the frontend side of the business here in India?
A: I think modern retail has existed in India for many years. There are some very famous and successful entrepreneurs in the modern retail space here in India. So the idea that this is a new industry is incorrect. It is maturing for Walmart and for our partners Bharti.
I don't necessarily see any obstacles, most likely it's just ensuring that we are able to grow in concentric circles and be able to ensure that as we build that backend and that frontend investment, we stay focused on being able to strip out inefficiencies, strip out cost that have been driving our prices and then do our part, play our part of giving back in communities in which we do business.
Q: I know it is perhaps a bit premature but there must have been thoughts in terms of brand strategy going forward because you have your cash-and-carry stores and that is under the Best Price brand, Bharti retail has the Easyday stores, we are perhaps now going to see Walmart stores, will it be the Walmart brand, will it be the Bharti-Walmart brand, what is the picture as far as the brand architecture is concerned?
A: If you look at our mature markets where we have had 15-20 years of experience, using Mexico for example, we actually have six different formats and six different banners. We do not see a single banner as necessarily the right approach.
Clearly in United States, our home market, Walmart and its main banner is obviously very well known. But, we are quite flexible in terms of ensuring that the right format with the right banner is in place.
In terms of where we are headed in India there isn't a grand plan. We have a successful cash-and-carry, Bharti-Walmart, the Bharti Easyday have done well with those banners. In terms of how we will move forward with further banners, I think it is probably a bit premature to say.
Q: So Easyday will continue to co-exist with Best Price and perhaps Walmart or Bharti-Walmart?
A: We shall see.
Q: When do you actually hope this business to turn profitable in India, because if I were to go by your experience in China, it took you almost a decade to turn profitable there? Given the fact that this is a capital intensive business, given the kind of restrictions and the economics around each store what would the ballpark estimate be in terms of turning profitable here?
A: I think you really cannot compare China and India. Our entry in China 16 years ago was still under pre WTO restrictions and as a result our portfolio in China grew in a very dispersed manner, which is not how we normally enter a market. I am not at this point ready to predict when we would be profitable in India.
I certainly wouldn't expect it to take 10 years. I think for us the important thing is that as we begin to invest in the market, we ensure that we balance the investments with those profitability needs. I don't think you can compare China and India.
Q: So you are saying you cannot compare China and India and you think you don't expect it will actually take you a decade to turn profitable in India or less than a decade to turn profitable in India?
A: That would be a good outcome.
Q: Just give me a sense of how business is looking in the rest of Asia at this point in time because most of these economies are facing a slowdown particularly in China?
A: I think slowdown is accurate relative to the previous levels but, quite honestly in China, we had very high levels of growth, both GDP and as well domestic consumption. I think everywhere around the world customers are being a bit more cautious with their dollars. But that doesn't necessarily reflect in any way a overall reduction in terms of our investment intent.
In terms of the coming next several months, I think there is a lot of macro economic uncertainty around Europe etc and what that will do to some of the export numbers in China. We are cautious as well. We have talked about the fact that we have seen a bit of slowdown but, that still means we are still seeing pretty solid growth levels relative to the rest of the world for China.