Friday, September 21, 2012

Wal-Mart to Step Into Indian Mega-Cities

Wal-Mart Stores Inc — the $446 billion retail behemoth — will be able to open stores in 22 cities across the country after the government notified a press note tonight permitting foreign direct investment up to 51 per cent in multi-brand retailing operations.
The press note — which contained fineprint that were not spelt out in the controversial press release issued last Friday after the cabinet formally cleared the proposal — means that Walmart can hit the road running, giving it first mover advantage over rivals such as Carrefour of France and Tesco of the UK.

The US giant — which slipped to second place in this year’s Fortune 500 list behind oil refiner Exxon Mobil — already has a cash-and-carry operation in India with Sunil Mittal-owned Bharti Enterprises through which it operates 17 wholesale retail stores.

The press note issued on Thursday night seemed to indicate that Walmart would be able to convert that operation into a multi-brand retailing operation and possibly ride on credits for its earlier investments in back-end operations.

The note said the foreign investor would have to invest a minimum $100 million (Rs 550 crore) in the retailing venture.

It said there were two other conditions that the foreign investor would have to meet:

At least 50 per cent of the total FDI brought in would have to be invested in back-end infrastructure such as warehousing, logistics, and facilities for manufacturing and distribution.

At least 30 per cent of the value of the procurement of manufactured/processed products should be sourced from small operators in India who haven’t more than $1 million in plants and machinery.

But the sourcing condition has been softened slightly. The rules say these retail stores can sell fresh agriculture produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products which may be unbranded.

This will enable Walmart to procure these from small Indian associates and meet the 30 per cent local sourcing condition.

The rules state the foreign investor can self-certify the size of his investment in the retail operation, the amount of money invested in back-end operations and the amount of sourcing from small local players.

“These could be cross-checked as and when required… the investors shall maintain accounts, duly certified by statutory auditors,” today’s note said.

But the note went on to add that the applications would be processed in the department of industrial policy and promotion to determine “whether the proposed investment satisfies the notified guidelines, before being considered by the FIPB for government approval”.

There is some confusion over the purpose of allowing the foreign investor to self-certify the scale of investment if the proposal has to be cleared by the FIPB anyway. Moreover, the Reserve Bank of India monitors fund flows into the country and the use of the proceeds.

In January 2006, the government had changed its vetting rules for FDI proposals for cash-and-carry retail by placing it under the automatic route. Until then, proposals for FDI above 51 per cent had to be cleared by the FIPB. Walmart formalised its partnership with Bharti Enterprises in August 2007 and came into the country soon after, sparking criticism at that time of a back-door entry.

Commerce ministry officials conceded that Walmart, which had invested a considerable sum in back-end operations for its wholesale stores, would become one of the first global giants to kick off full-scale retailing operations in the country.

“The real crux of the investment dilemma will be this rule on creating back-end infrastructure within the first three years… typically a retailer coming here would start with an investment of at least $500 million. Of this, $250 million would go towards back-end sunk costs which will not immediately give him a profit … that’s daunting,” said top commerce ministry officials who were part of inter-ministerial groups on FDI in retail.

The rules also say that foreign investors can only set up retail sales outlets in states that allow them to do so under “applicable state laws such as Shops & Establishment Act”.

Retail outlets can be set up in cities with more than 10 lakh people according to the Census 2011 and extend them to the suburbs up to a distance of 10 kms. For states that do not have large cities, the state government can pick the cities where retailers will be allowed to set up retail operations.

A close look at Census 2011 throws up a list of 22 cities in the 10 states that have decided to allow multi-brand retailing. These include 10 cities or urban agglomerations in Maharashtra, three in Rajasthan, three in Andhra Pradesh, one each in Delhi, Haryana and Jammu and Kashmir.

Three other states — Assam, Manipur and Uttarakhand — and the Union territory of Daman & Diu do not have any city with a population exceeding 10 lakh. The biggest city in Assam — Guwahati — has a population of 9.63 lakh. Imphal is Manipur’s biggest city with a population of 2.65 lakh. Dehradun in Uttarakhand has a population of 5.78 lakh.

Land price and rentals will not be counted as investment in back-end infrastructure. That could prove to be a problem for players such as Carrefour and Tesco.

Officials said the European retailers such as Carrefour and Tesco, both of whom have faced a financial downside in the recent past, will be able to enter the market only after marshalling their finances, and “that will take time, perhaps years”.

In contrast to Walmart, Carrefour, the world’s second-largest retailer, runs just two wholesale stores in India. The French giant posted a less than 1 per cent growth in 2011 and saw its net income decline by over 14 per cent.
from The Telegraph