Wal-Mart Is Finally Opening Its Stores In India
The Indian government recently announced that it will allow the foreign retailers to hold a majority share in the multi-brand stores, which are the stores operated jointly by the foreign and local retailers, offering products of different brands under the same roof. This decision came as a big relief for Wal-Mart (NYSE:WMT), which has been looking to root its presence in the Indian market since 2007. The management of Bharti- WalMart, a joint venture of Bharti Enterprises and Wal-Mart, stated that Wal-Mart will open stores within the next 18 months. Although this will be a boon to Wal-Mart’s expansion strategy in long term, the short term impact is likely to be minimal.
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Wal-Mart’s India Presence
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Prior to this development, the Indian government policies limited the foreign retailers to operate only the wholesale and single brand stores. Wal-Mart entered into an agreement with Bharti enterprises in 2007 to establish its wholesale chain under the name of “Best price”. [1] The company opened its first store in 2009 and currently operates 17 cash and carry outlets catering mainly to the small stores and business owners. [1] It competes with Carrefour, Tesco and Metro AG who operate similar stores in partnerships with Indian companies.
The retailer is certain that the large scale formats will not be successful in India mainly because of the space constraints. Therefore it will look to open neighborhood stores (4000-5000 sq. ft.) and compact hypermarkets (40,000-50,000 sq. ft.). [2] Similar to its stores in Brazil and Mexico, about 90% of the products will be sourced from within the country. [3] Wal-Mart is also considering investing in Easy day, a Bharti enterprises retail chain.
Potential Market for Retail Chains
India is the second most populated country in the world with over 1.2 billion people. The retail market is still untapped by major chains and mainly comprises of small local retail stores. Being a developing economy, it has a huge scope of improvement in the supply chain.
According to Technopak, a private research firm, the Indian retail market will record an annual turnover of $505 billion in 2012 which is expected to increase to $725 billion in the next 5 years. [4] Out of the total sales, the retail chains only account for $33 billion. [5] This figure clearly indicates that the market is quite unexplored for companies such as Wal-Mart.
Bharti Enterprises operates 186 “Easy day” stores, which have been reasonably successful. This provides an opportunity to the foreign retail chains to gain acceptance in the country. [2]
Impact on Wal-Mart
Wal-Mart international operations contribute about 40% to the company’s value. Wal-Mart had 5,650 international stores in 2011 and we forecast this figure to grow to 6,280 by the end of 2014. Since this is initial phase, Wal-Mart will be cautious in opening stores and test it out before an aggressive expansion. The value addition in short term will be minimal as there won’t be any significant increase in the number of stores. However in the long term, it could have a significant impact on company’s stock due to the sheer size of Indian market and gradually improving standard of living which will aid the adoption of retail chains.
Our price estimate for Wal-Mart stands at $70, implying a discount of about 5% to the market price.
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