Bharti Enterprises Ltd and Wal-Mart Stores Inc. have called off their Indian joint venture Bharti -Walmart, bringing to an end the troubled five-year saga of the company that runs wholesale (or cash-and-carry) stores called Best Price Modern Wholesale across India.]
With the two companies going their separate ways, everyone’s attention is on whether Wal-Mart will seek a new partner, or enter the supermarkets business here, or both, and on Bharti’s own retail plans.
Bharti has already appointed Raj Jain, the former chief executive of Bharti-Walmart, as an adviser. And the Reliance group is being mentioned as possible partners for Wal-Mart, although a person familiar with the US retailer’s plans who did not wish to be identified said the company is unlikely to “rush into another joint venture” and would instead work with the government to create a more conducive regulatory environment for foreign retailers. A spokesman for Reliance Industries Ltd declined to comment.
The partnership between Bharti and Wal-Mart has been dogged by allegations of breaking Indian investment rules and mismanagement, and also bad timing.
The break-up has been in the air, especially after recent statements by Bharti chairman Sunil Bharti Mittal and Wal-Mart Asia CEO Scott Price that the two foreign partners were evaluating the joint venture.
Wal-Mart will acquire Bharti’s 50% stake in the joint venture, giving the US retailer 100% holding in the company that runs 19 Best Price Modern Wholesale stores.
“Given the circumstances, our decision to operate independently will be beneficial to both parties. Through Wal-Mart’s investment in India, including our cash-and-carry business, supply chain infrastructure, direct farm programme and supplier development, we want to serve India and its people, and continue to make important social and environmental contributions to the country. Wal-Mart is committed to businesses that serve our members and provide good returns for our shareholders,” Pricesaid in a statement.
The statement is at odds with a theory put forth by a former employee of the company who claimed Wal-Mart could downsize its Indian operations and presence, and lie low as it waits for all the controversies surrounding it to blow over and the regulatory environment to improve. This person spoke on condition of anonymity.
Wal-Mart has publicly articulated its ambitions to run supermarkets or invest in so-called multi-brand retail in Asia’s third-largest economy, but will need a partner to do so because India allows a maximum investment of 51% by foreign retailers in supermarkets.
“..we will continue to advocate for investment conditions that allow FDI multi-brand retail in India. We wish Bharti well as they grow their retail business,” Price added.
The new FDI policy did not allow Wal-Mart to invest in multi-brand retail through the existing Bharti Retail business, said a Wal-Mart India spokesperson. “The decision to independently own and operate separate business formats in India is based on external and internal factors, including the new FDI policy.”
Reliance Retail Ltd, Kishore Biyani’s Future Group and Aditya Birla Group’s More are the only retailers without foreign connections. Tata and Tesco already have a relationship.
Bharti will, for its part, acquire the debentures held by Wal-Mart in Cedar Support Services, the holding company of Bharti Retail Ltd that runs the Easyday chain of retail stores. The debentures were sold by the Indian company at a time when foreign direct investment (FDI) wasn’t allowed in supermarkets (or so-called multi-brand retail).
“Bharti is committed to building a world-class retail venture and will continue to invest in Bharti Retail across all formats. We believe that with our current footprint of 212 stores, we have a strong platform to significantly grow the business and delight customers. We wish Walmart the very best for the future,”Rajan Bharti Mittal, vice-chairman and managing director, Bharti Enterprises said in the statement.
In a town-hall meeting at the Bharti Retail office, Rajan Mittal announced Jain’s appointment as adviser. He said the company has aggresive plans for Easy Day, and even hinted at a possible entry into the wholesale or cash-and-carry business.
A person familiar with the events at Bharti Retail who didn’t want to be identified said that with various internal and external issues are now out of the way, “Bharti can go back to its original plan and really scale up.”
Indeed, Bharti could even find a foreign partner, said a retail consultant who asked not to be identified. “From a business point of view, Bharti is a pretty attractive candidate in the retail business and very few companies will play at this scale in today’s time.”
A second person familiar with events at Bharti Retail said last week that the company’s promoters were not exactly happy at Wal-Mart’s bureaucratic methods, especially given the pace at which they had scaled up their telecom business Bharti Airtel Ltd. This person too did not wish to be identified.
Last week, Sunil Mittal said in Johannesburg that the two companies were reviewing their relationship, and may break up.
“Within October, I would say, Wal-Mart should have taken a decision of their vision for India, and Bharti could have taken a decision whether it matches our aspirations,” Mittal said on the sidelines of the second India-Africa Business Council (IABC) meeting.
Soon after, Price echoed those sentiments.
“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, the FDI has passed,” said Price on the sidelines of the Apec conference in Bali, Indonesia. “That means the existing franchise to Bharti is not tenable as the base. What we are talking about with Bharti is what we do with that business.”
Formed in 2007, Bharti Walmart Pvt. Ltd runs Best Price Modern Wholesale stores in cities such as Amritsar, Jalandhar, Kota, Bhopal, Ludhiana, Raipur, Vijayawada, Agra, Meerut, Lucknow, Jammu, Guntur, Aurangabad, Amravati, Hyderabad and Rajahmundry. At the time, Bharti said it would also leverage learnings from Wal-Mart to run its own retail stores.
Shortly after its launch, the Wal-Mart team in India also started running Easyday, although at the time Indian laws didn’t allow foreign investment in multi-brand retail. It was only in September last year that the government allowed foreign supermarket chains to hold a stake of up to 51% in multi-brand retail.
Wal-Mart invested $100 million in Cedar, the holding company of Bharti’s retail operations around the same time as it formed the joint venture.
Indian law at the time wasn’t explicit on whether such investments in holding companies, especially if made through convertible debentures, amounted to FDI in subsidiaries.
After some politicians, likely fed the information by Bharti’s corporate rivals, raised this, India’s commerce ministry and the Reserve Bank of India (RBI) bounced the contentious issue around before passing it on to the Enforcement Directorate, which looks at foreign exchange violations. Both Bharti and Wal-Mart have maintained that their investments were legal at the time they were made.
By the time India got around to allowing 51% FDI in multi-brand retail, Wal-Mart had run into more trouble.
It announced that it was probing corrupt practices in its Indian operation under the under the US Foreign Corrupt Practices Act (FCPA).
In June 2013, its India head Jain quit.
The former employee said that much of the American retailer’s woes had to do with its rush to establish itself in India.
Wal-Mart was pretty much running the operation, this person added, with Bharti behaving largely like a financial investor.
After India announced its rules regarding foreign investment in supermarkets, Wal-Mart also sought clarity on aspects of the policy, specially the sourcing clause. In July, it expressed an inability to meet the norm requiring it to source 30% of the goods it sold from small industries, saying it could source only about 20%.
In August, Price met top officials of the department of industrial policy and promotion and sought clarity on the recent changes the government had made in the multi-brand retail FDI policy.
A government official said at the time that an application from the company was imminent. “They have indicated to come back to us very soon with a firm proposal. The consideration by Wal-Mart is very serious for India and their plan is possibly in the last stage,” the official told the Press Trust of India.
Price declined comment after his hour-long meeting. To be sure, there has been no announcement by either Wal-Mart or the commerce ministry about an application by the American retailer to open supermarkets in India.
Wal-Mart said in its statement announcing the break-up with Bharti that it would continue to work with the government to create “conditions that enable FDI in multi-brand retail”. India does allow this, but with conditions that many foreign retailers, including Wal-Mart, find unpalatable.
Some see the Bharti Wal-Mart breakup as something that will create doubt in the minds of other foreign retailers looking to enter India.
“A situation like this is likely to raise questions on what environment India is creating to do business here,” added Kumar Rajagopalan chief executive at Retailer’s Association of India.
But an executive at a foreign retailer that is looking to enter India said the issue was of no consequence.
What’s important, added this person who did not wish to be identified is “clarification on the policy.”
His company will wait, he said.