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Can Bharti do without Walmart in India?

While solo could be the way forward for Bharti in retail, the split with Walmart would not be easy because of their shared assets

Nivedita Mookerji  |  New Delhi 

Four year ago, in 2009, the Bharti group (flagship Bharti Airtel, India's largest telco) had called off a $23-billion deal for amalgamation with Africa's largest telco, MTN. This was the second time that Bharti was trying to merge with MTN to be able to enter the African market, the final frontier for the world's telcos. But, Bharti Chairman Sunil Mittal didn't give up: within six months of the second failed attempt, Bharti inked a $10.7-billion deal for a controlling stake in Kuwait-based Zain to expand its footprint into Africa.

Something similar is being played out back home: there is a very strong buzz that Bharti is ready to part ways with Walmart, the world's largest retailer. The two together equally own Bharti Walmart which is into the cash-and-carry business; i.e. it sells only to shopkeepers. Insiders say the parting of ways is imminent; the only question is how will Mittal bounce back from here, like he did in Africa? In fact, before Walmart came into the picture, Bharti was in talks with UK's Tesco for a possible venture. When Tesco didn't work out, Bharti went ahead and tied the knot with Walmart, without wasting any time. In that sense, Bharti is not wedded forever to Walmart, and is known to other retail giants of the world.

The challenge
Bharti has been together with Bentonville-based Walmart for six years now, starting their joint venture in 2007. At that time, the government allowed up to 100 per cent foreign direct investment, or FDI, in cash and carry. However, FDI in front-end multi-brand retail was not allowed. Interested parties lobbied hard to open up the sector fully. Walmart had signed up with Bharti in the hope that they would extend the partnership to front-end retail once India permitted FDI in multi-brand retail as well. With this in view, Bharti set up EasyDay retail stores under another company called Bharti Retail. It was understood that Walmart would buy into the business once government opened up the sector

In September 2012, the Union Cabinet permitted up to 51 per cent FDI, but Walmart didn't move its application. Riders in the multi-brand policy, especially mandatory 30 per cent sourcing from small and medium sector units in India and a minimum $100 million investment into fresh facilities of which 50 per cent would be in backend, have held Walmart back. Also, it has been left to the states to decide whether they want foreign retail chains or not. Several states, especially those not ruled by the Congress and its United Progressive Alliance allies, have said they will not let them in because that will hurt the traditional grocery stores. Most overseas retailers turned cautious. Not just Walmart, even UK's Tesco and France's Carrefour have decided to wait and watch.

The government has refused to bend any of the conditions linked to the multi-brand FDI policy. Commerce & Industry Minister Anand Sharma reportedly said that policies are not made for specific "The government should be pragmatic, and not dogmatic," says Arvind Singhal, founder and chairman of Technopak Advisors, a retail consultancy. But, ahead of so many state polls and general elections, the government cannot afford to relax the norms in retail as multi-brand FDI has already been a politically sensitive matter.

This is not the only challenge Walmart faces in India. Five Bharti Walmart executives were suspended in an anti-corruption drive. One among them, Pankaj Madan, was later absorbed by Bharti's telecom business. A few months ago, Walmart's India head, Raj Jain, was replaced by Ramnik Narsey as interim chief. At Bharti Retail also, Chief Operating Officer Mitch Slape, an old Walmart hand, was sent back to Walmart US recently. Another headache was Walmart's investment of $100 million in Cedar, the parent company of Bharti Retail, in March 2010 in the form of compulsory convertible debentures. This investment is being investigated by the Enforcement Directorate for alleged FEMA (Foreign Exchange Management Act) violations. While the deadline to convert the debentures into 49 per cent equity, after a few extensions, was September 30, 2013, Walmart sought another extension of one year recently.

The Bharti group, on its part, is learnt to be upset that its cash-and-carry business, the Best Price Modern Wholesale stores, which was expanding till last year hasn't added even a single store this year and has been stuck at 20 outlets. Bharti Retail's EasyDay, for which Walmart provides backend support, hasn't grown either this year beyond a little over the 225 stores it had. The cash-and-carry venture's losses were pegged at Rs 372 crore as of December 2012. Bharti Retail had accumulated losses of Rs 1,522 crore as of December 2012. It had reported net loss of Rs 538 crore on revenues of Rs 1,528 crore for the year ended December 2012.

The road ahead
Even as the buzz around a possible spilt has been around for a while, top executives from both sides gave hints of a ble breakup through the past week. Scott Price, president and CEO of Walmart Asia, told reporters in Bali, on the sidelines of an Asia Pacific Economic Cooperation forum on Sunday, that its existing franchise with Bharti was not tenable as a base, thereby leaving a question mark on any front-end retail agreement. "Frankly, FDI has passed," Price told Reuters. "Both the sides (Walmart and Bharti) are looking for the best way to move forward." A few days before that, Sunil Mittal, who was in Johannesburg attending a meeting of the India-Africa Business Council, said Bharti would take a call on its retail business after Walmart's India strategy was clear. Mittal indicated that Walmart's decision was expected by this month. Within days, Price said it may take "several weeks". When asked whether the deal with Bharti was off, the Walmart India spokesperson said after Price's statement, "We have nothing further to add at this point." Bharti refuses to comment.

The all-important question is if Bharti can go alone from here? Singhal argues that "there are many examples of Indian running retail business on their own; so, why not Bharti?" Singhal cites Mukesh Ambani's Reliance Retail, which too started on its own, as a good model for revenue and profitability, though he adds that "the learning curve can be steep". Also, he cautions that the split between Bharti and Walmart would not be an easy one because they have shared assets. According to Deven Choksey, managing director, KRChoksey, a leading brokerage firm, every company must begin on its own and then look for a tie-up. While bandwidth would be an issue for Bharti in retail as it's a telco, that's the way to go, he adds. He, however, admits that Bharti is already facing challenges in telecom and its promoters may like to focus on the core business right now.

Rivals and experts list out the likely options before Bharti and Walmart, if they decide to part ways. One, Walmart may buy out the cash-and-carry business in India, where 100 per cent FDI is allowed. In such a scenario, Bharti would focus on running Bharti Retail on its own. It is also possible for Bharti to get another foreign retail chain as a partner. Among those in India, French chain Carrefour is still without a partner, and then there are others like US-based Target which too may decide to come on a later date. Bharti could even tie up with private equity funds.

Two, Walmart could always come back into Indian front-end retail after a gap, with a clean record, wiping away bad memories of investigations by the Enforcement Directorate and probe into its lobbying disclosures. Also, the policy scenario would become clearer with time. If Bharti is still without a partner at that time, they may forge an alliance yet again, sources point out. But that's not the only scenario. Although unlikely, Walmart may decide to exit India altogether. In that case, Bharti may run cash-and-carry on its own or sell it off to another company. Walmart has maintained it does not want to exit India.

However, Price was candid in saying Walmart was not keen to invest in India unless the multi-brand retail policy becomes clear. Price elaborated at the Bali conference on what he meant. "We created a franchise in retail with Bharti in the hopes that there could be a potential freeing up (of FDI) that would allow it to potentially be the base of the business. But frankly, FDI has passed," Price told Reuters. According to Price, it's not possible for any foreign retailer to comply (with the conditions). He added that "no domestic retailer is complying either."

While many permutations and combinations are on the table right now, life without each other won't be easy for either. "Bharti may not be a retailer from the knowledge point of view, but retail is a solid bet for the group," says an industry representative. Bharti had wanted to revolutionise the retail sector along with Walmart, and that hasn't gone according to plan. And Walmart may be disappointed that Bharti has not delivered in terms of managing the policy environment, says an expert.

THE INDIA JOURNEY

* Walmart and Bharti Enterprises announced their 50-50 cash-&-carry JV in 2007

* The first cash-and-carry or wholesale store, Best Price Modern Wholesale, opened two years later in 2009

* Currently, there are 20 Bharti-Walmart cash-and- carry stores across India, with no expansion this year

* Bharti Retail, a fully-owned Bharti venture, opened in 2008. It has 225 stores at present, but not a single one opened this year. Walmart has a franchise pact with Bharti Retail and provides it backend support

* Roadblocks: Walmart is not keen on opening front-end retail in India because of tough conditions in the multi-brand retail FDI policy, especially 30 per cent mandatory sourcing from Indian small and medium sector and a minimum $100 million investment in new facilities with 50 per cent going into greenfield backend. Enforcement Directorate probe into Walmart's $100-mn investment in the Bharti group in 2010 for alleged FEMA violation. Walmart's lobbying disclosures to the US Senate for greater access to Indian markets has also snowballed into a political crisis

First Published: Mon, October 07 2013. 23:02 IST
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