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Policy muddle pushes Bharti Retail on the back foot

Close to 20 properties identified by the retailer for its easyday stores have been returned, as partner Walmart grapples with regulatory issues and graft charges

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Nearly five years after rolled out its first easyday store in Punjab, Sunil Mittal's ambitious project appears to have come to a grinding halt. Having grown to over 200 outlets in five years since its launch in 2008, Bharti Retail has been unusually quiet on expansion this year, just as it has been for its cash-and-carry venture with American chain Walmart. This is in contrast to the fast-paced expansion by rival Mukesh Ambani's which seems unmindful of the industry concerns over foreign investment norms in multi-brand retail.

That Bharti Retail returned close to 20 properties which were supposed to have been leased for its easyday stores, according to recent reports, has only added to the air of uncertainty around the business. Many in the industry dismiss the development as a routine event in the retail sector, arguing that "properties could be released without much heartburn when taken on a token amount with the condition that stores would open on a later date". That way the only thing one loses is the token amount. However, once the lease is signed, a lock-in period comes into effect, making it difficult to terminate the deal.

There's no clarity on the kind of deals that Bharti Retail may have signed for the properties in question. The company, in response to a questionnaire on its expansion plans and the reasons for the slowdown, says: "The retail industry is currently awaiting clarity around its suggestions to the government on the conditions linked to foreign investment in multi-brand retail. Once we have clarity, we will be in a position to spell out our future plans. Until then, it's business as usual at Bharti Retail and our joint venture with Walmart."

Business of few words
Unlike its listed telecom business, Bharti Airtel, Bharti's retail project has been a closely-held private affair as far as financial numbers and top management movements are concerned. Not surprising then that the last media announcement made by the company, as listed on its official website, was nine months ago on 3 November 2012 when it opened its fourth easyday store in Karnataka. This long spell of silence, according to an industry watcher, is a reflection of the company's current state of mind.

When Mitchell Slape, who was vice-president at Walmart's Mexico unit, was appointed chief operating officer (COO) of Bharti Retail in April 2012, again the company did not make any announcement. Not much is known about others in the top management, except that Bharti Retail has been functioning without a chief executive for long now, a scenario that is not quite in sync with the group's other key businesses.

Vinod Sawhney, a top executive, was given charge of the business as president and CEO when Bharti Retail, a subsidiary of the $12-billion Bharti group, was set up in 2007. Following Sawhney's exit a few years later, Andrew Levermore took over. Levermore returned to South Africa early last year to do his own thing and Slape was brought in as the COO.

In yet another step that may have raised many eyebrows, Rajan Mittal, Group Chairman Sunil Mittal's younger brother, who's been at the forefront of the retail business right from the start, stepped down as director of Bharti Retail last year, though he is still on the board of Bharti-Walmart, the cash-and-carry venture. Dismissing any link with the Enforcement Directorate probe in the $100-million investments by in alleged violation of foreign investment norms in Cedar Support Services, a Bharti group company, a spokesperson had said Rajan resigned from the Bharti Retail board because he wanted to "take out time for his other commitments". Rajan was replaced by Bharti group's general counsel and company secretary, Mukesh Bhavnani. Sunil Mittal, who too was on the Bharti Retail board when it was founded in 2007, stepped down as director in March 2008.

These developments should be seen in the backdrop of the uncertain regulatory framework that has kept multinationals from making investments even a year after foreign investors were permitted to enter the multi-brand sector. Bharti Retail is running in losses, it is learnt, and is a long way from breaking even.

In 2007, Bharti had announced a 50:50 wholesale joint venture with Walmart, while setting up its own retail business. The idea was to wait for the sector to open up to foreign investors, when perhaps Walmart could buy into Bharti's retail business. Walmart has been providing backend and technology support to Bharti Retail, apart from the fact that a Walmart veteran is running the company now.

Even as it's possible for Walmart to buy up to 51 per cent in Bharti Retail, as allowed in the policy on foreign investment in multi-brand retail, many hurdles have come in the way in the recent months, thereby throwing things into a disarray.

GIVING UP ON GROWTH
  • 212 easyday stores are there in the country as of July 2013
  • 330 stores were planned initially by December 2013; 600 by December 2018
  • 17 properties taken for easyday were returned recently
  • First store was opened in 2008; no new stores so far in 2013
  • COO Mitchell Slape ,a Walmart executive from Mexico, heads Bharti Retail
  • Rajan Mittal stepped down as director of Bharti Retail last year, though he is still on the Bharti-Walmart board. Group Chairman had resigned from the Bharti Retail board in 2008
  • Losses of Bharti Retail are estimated at Rs 1,522 crore till December 2012
  • Walmart could convert debentures purchased in Cedar Support Services in 2010 into equity shares by September 2013

Source: Industry


Speedbreakers
Bharti group, like many others in the industry, is waiting for clarity on multi-brand policy guidelines, especially those related to mandatory 30 per cent sourcing from small- and medium-sized industries in India and 50 per cent investment in backend infrastructure, before moving ahead on expansion. While there are indications that the government may relax some of these conditions, Bharti Retail may still have some worries before moving full steam ahead, and that too with Walmart, which it calls its "natural partner".

The Enforcement Directorate probe into Walmart's alleged investment of $100 million convertible debentures in Bharti Retail in 2010, when foreign investment was not allowed in the sector, is a big stumbling block. Enforcement Directorate started the investigation last year when Member of Parliament MP Achuthan referred the matter to the Prime Minister's Office. More recently, the Central Bureau of Investigation also came into the picture, pointing out that the violations in the case were related to FEMA (Foreign Exchange Management Act) and, therefore, should not be in its purview.

Not just that, Walmart is conducting an internal probe into possible violations of the US Foreign Corrupt Practices Act, which prohibits a US corporation from bribery in any country. Bharti Walmart had suspended five executives last year as part of the ongoing investigation. Recently, Walmart India head Raj Jain quit under mysterious circumstances, and was replaced by Ramnik Narsey as interim head.

On top of that, Indian Parliamentarians asked for an enquiry into lobbying activities of Walmart to gain wider access in the Indian market. This followed reports of Walmart spending $25 million over four years to lobby the US government to gain access to overseas markets including India. Although lobbying is legal in the US and companies have to mandatorily make submissions to the Senate with the details on lobbying, the Indian government set up a one-man committee headed by Justice Mukul Mudgal (former Chief Justice of Punjab and Haryana High Court) to investigate the issue. Its report is expected to be tabled in Parliament in its monsoon session.

Stagnant portfolio
So, what does Bharti Retail look like now? The company website puts the number of stores at over 220. However, it is learnt that there are 212 outlets across the country, with hardly any opening this year. The chain had earlier set a target of 330 stores by December 2013 and over 600 by December 2018, according to initial projections. The cash-and-carry business also stopped expanding after 2012, at 20 stores.

Bharti Retail operates neighbourhood stores called easyday, compact hypermarker stores called easyday Market and hypermarkets called easyday Hyper.

Although the company does not talk of any numbers, published reports citing internal documents show that Bharti Retail had accumulated losses of Rs 1,522 crore till December 2012. Reports also suggest that Walmart could buy 49 per cent stake in Cedar Support Service, the holding company for Bharti Retail, by September for Rs 455.8 crore. In other words, the American chain could convert the debentures purchased in March 2010 into 426 million equity shares. The conversion cut-off date is September 2013, but it can be extended.

As an industry analyst points out, Bharti Retail's plans were as aggressive, if not more, as Reliance Retail's till recently. But things seem to be slowing down of late. Bharti Retail, which has almost 7,500 employees currently, had said it aimed to engage 60,000 people by 2015. Reliance Retail, with 35,000 employees, is talking of growing to 120,000 over the next five years.

Will Bharti Retail clear the hurdle? Much of it will depend on how things play out for Bentonville-based retail giant Walmart in India, experts tend to think.

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