Shishir Asthana: Lessons from Walmart's failures

Like South Korea, Germany and Russia where Walmart didn?t succeed, India too could be a tough market

Even before FDI in retail could impact Indian farmers and kirana store owners, it claimed its first victim in Trinamool Congress, a key partner of the ruling party in the country. There is little doubt that FDI in retail will be a major political issue in the coming state and central elections.

There is enough evidence in global markets to show that global retailers impact local economies, since it is a simple game of labour arbitrage. The US has lost most of its manufacturing base, apart from construction, automobiles and aeronautics on account of labour arbitrage. While labour is available at $8 an hour in the US, China’s factories pay $5 a day. Little wonder then that Walmart was able to exploit this arbitrage and succeed in the US and other developed markets.

However, Walmart has not always met with success. The company had to back out of South Korea, Germany and Russia. A look at its failures can hold some promise for our kirana shop owners.

In South Korea, the company did not understand the consumer psyche. Koreans are quality conscious and do not buy products that are available at the best price but would prefer buying only the best in quality. Further, they have sense of patriotism in their purchasing pattern and prefer a local product over an imported one. None of these qualities are virtues for an average Indian consumer.

In Germany, Walmart had trouble winning customers who are very price conscious and would prefer jumping to a different store in the neighborhood. Local retailers were able to drive away Walmart with better pricing strategy. Though Indian customer too are price focused, we do not have retailers with the financial power and purchasing reach to give Walmart a run for its money. In any case the kirana shop owner will never be able to match the retailer’s price. Both these examples show that local cultures have a lot of bearing on the success of a retailer.

In Russia, Walmart was not able to succeed for an entirely different reason. The major reason for its failure was high land prices which had shot up sharply and stayed high despite the 2008 crisis. Walmart has a specific format for its stores, which requires huge parking spaces. None of the existing retailers in Russia operated with that format, thus there was little opportunity for acquisition too.

It is perhaps reasons such as the one in Russia, which can also come into play in India and restrict growth of global retailers to some extent. Real estate prices are high especially in cities which have a population greater than 1 million, which is the minimum population criteria set by the government. Further, parking space offered by the current set of retailers is too small and is often inadequate even now. An acquisition based on this parameter will thus be prohibitive.

Perhaps, high real estate prices will have some role to play and help both kirana stores and existing domestic retailers survive.