Split Story

• Good times (Nov 2006 to Sept 2012): Bharti, Walmart announce venture in November 2006; First cash-and-carry store in May 2009 in Amritsar; Twenty such stores set up across India; Govt allows 51% FDI in multi-brand retail in September 2012, first Walmart store seen by early 2014

• Bad times (Nov 2012 to Sept 2013): ED probes Walmart investment in Bharti arm in 2010 when there was no FDI; Bharti Walmart sacks five executives as Walmart launches global anti-corruption drive; One-man panel probes Walmart lobbying in US for access to India;
Walmart India head Raj Jain quits; Walmart seeks relaxation of sourcing rule. Govt refuses

New Delhi, Oct. 9: The Beast of Bentonville has snapped its ties with the Bharti group.

The $466-billion Wal-Mart Stores Inc, the world’s biggest retailer, today broke up its seven-year-old joint venture with Bharti Enterprises, signalling its intent to go it alone in a country where its ambitions have been severely circumscribed by government rules on foreign investment and a well-connected partner that it didn’t see eye to eye with.

Under the terms of the divorce, Walmart will buy out the Bharti group’s 50 per cent stake in the wholesale retailing operation through which it runs 20 stores in the country sprawled across an area of just over 1 million square feet.

Both sides refused to say how much the Bentonville, Arkansas-based retailer would pay the Bharti group for its stake in the cash-and-carry operation they announced with great fanfare on August 6, 2007. But the first wholesale store didn’t start operations until late 2009. The stores operate under the brandname Best Price Modern Wholesale.

Walmart has not opened a wholesale store in India for about a year despite earlier plans to open eight in 2013. Bharti, in turn, will acquire $100 million of compulsory convertible debentures held by Walmart in Cedar Support Services, a company owned and controlled by the Indian firm.

In a joint statement, the companies said they had agreed to independently own and operate separate business formats in India and discontinue their franchise pact in the retail business. The divorce is subject to finalisation of definitive agreements and requisite regulatory approvals.

The Bharti group will continue to run its retail outlets that it has formed under the brandname Easyday.

“We believe that with our current footprint of 212 (retail stores), we have a strong platform to grow the business,” said Rajan Bharti Mittal, chairman of Bharti Enterprises.

“Given the circumstances, our decision to operate independently will be beneficial to both parties,” Scott Price, president and CEO of Wal-Mart Asia, said in a statement.

“Walmart is committed to businesses that serve our members and provide good returns for our shareholders and we will continue to advocate for investment conditions that allow FDI in multi-brand retail in India,” he said.

The break-up is seen as a setback to Walmart’s plans to blitzkrieg India’s $ 500-billion retail business.

It also left several questions hanging in the air: Will Walmart stick to the wholesale format in India? Or will it decide to enter the front-end retail segment as well?

Walmart operates 356 wholesale stores outside the US, or just under 6 per cent of 6,148 stores that come within the ambit of Walmart International that oversees overseas operations.

Mexico — the first country outside the US that Walmart went to in 1992 — has the most number of wholesale stores at 142 out of the 2,353 units it operates in that country.

Last September, the government relaxed foreign investment regulations to allow foreign retailers such as Walmart to invest up to 51 per cent in front-end operations. But foreign retailers were not terribly enthusiastic about operating front-end stores because of two restrictive conditions. They were required to invest at least 50 per cent of their investment in creating back-end infrastructure, and source at least 30 per cent of the value of the procurement of manufactured/processed products from small operators in India who haven’t invested more than $1 million in plants and machinery.

If it decides to enter the front-end retail space, Walmart will have to seek a new business partner who will need to have sufficient money to bankroll a highly-competitive, cash-guzzling operation.

In China, for instance, where Walmart has 393 stores, it has opened just under 40 stores every year since 2008. In Mexico, it has opened an average of 266 stores every year since 2008. By contrast, it has been a painfully, slow crawl in India.

Analysts said the Bharti group wanted to break the relationship with Walmart to grow its own retail brand. Walmart had shown great reluctance to invest in front-end retail because of the restrictive riders.

Moreover, the political landscape is also starting to change with opposition to foreign retailers starting to grow. The BJP has already made it clear that it won’t allow MNCs in the retail business if its voted to power in the general elections next year. Left parties have also voiced strong objections. A Congress-led combine or a third front coalition may be forced to appease these elements.

At the same time, Bharti Airtel has become financially stretched after buying a clutch of telecom firms in the developing world including Africa’s Zain. As a result, it has run up a debt of $12 billion. It has been shedding its minority stakes in several firms in recent months in order to trim its high debt.

Analysts said the Bharti group could earn at least $200 million from the stake sale to Wal-Mart.