Walmart opened its doors in 1962 based on Sam Walton’s strategy of creating the lowest prices anytime, anywhere. By 1967, the Walton family was running 24 stores bringing in $12.7 million in sales. By 2012, the company served more than 200 million customers each week, employed 2.2 million associates worldwide, in more than 10,000 stores in 27 countries. After waiting years to open a “Superstore” in India, ambitious plans to expand in the country have seized to continue. India, the world’s largest retailer, has a difficult time with the regulations of the country as well as finding a foreign chain to help invest in the country’s $400 billion retail sector (Pasricha, 2013).
Walmart has said it would end its joint venture with Bharti Enterprise Limited amid continued difficulties navigating regulations on foreign investments. To continue the organizational success Walmart has achieved, the organization will need to continue to research several key factors.
These factors include: India’s restrictive rules on foreign firm operations, the target market blunder, Walmart’s past efforts to penetrate the retail industry in India, and any challenges encountered in partnership with Bharti. Walmart ceases operations in India because of failed partnership and restrictive government regulations on foreign investments. Wal-Mart’s Ethics
Wal-Mart set its business foundation on values and ethics that leads the company. The values that direct the company and leadership are three fundamental beliefs, which are respect, exceptional service to customers, and striving for excellence. Wal-Mart’s guiding principles are put in position to assist employees to make informed, ethical decisions with integrity. Sam Walton set the following guiding principles for employees to follow (Wal-Mart, 2008). •Act with integrity (Wal-Mart, 2008).
•Lead with integrity, and expect others to work with integrity (Wal-Mart, 2008). •Follow the law at all times (Wal-Mart, 2008).•Be honest and fair (Wal-Mart, 2008).•Reveal and report all information truthfully, without manipulation or misrepresentation. •Work, actions, and relationships outside of your position with the company should be free of any conflicts of interest (Wal-Mart, 2008). •Respect and encourage diversity, and never discriminate against anyone (Wal-Mart, 2008). •Ask your manager of the Global Ethics Office for help if you have questions about this Statement of Ethics, or if you face an ethical problem (Wal-Mart, 2008).
•Promptly report suspected violations of the Statement of Ethics (Wal-Mart, 2008). •Cooperate with and maintain the private nature of any investigation of a possible ethics violation (Wal-Mart, 2008). •When involved in an ethics investigation, you should reveal and report all information truthfully. You should present all the facts you are aware of without personal opinion, bias, or judgment (Wal-Mart, 2008). The company is the leading retailer in the world that has gone green. Wal-Mart’s focus in 2005 was to create a sustainability strategy that involves reducing waste, sell sustainable goods, and use renewable energy. Wal-Mart communicated its mission to its 60,000 suppliers through a packaging scorecard that essentially assists with purchase decisions.
The company executed its goal by building energy-efficient stores and implemented reusable bags created by recycle materials (Wal-Mart, 2008). Every business association of Wal-Mart functions are projected to encompass a comprehensive set of guiding principles offering direction to employees and business associates in every worldwide location. Wal-Mart also publishes several “global policies,” which are designed to give associates a set of rules that are the same for all locations. Wal-Mart’s Statement of Ethics is valid global policy associates must abide by.
However, the company stipulates that if the Statement of Ethics does not meet the local policies or state laws associates must act according to local policies and laws. The company depends on the associates to learn and act on local laws and policies that may affect the business. Wal-Mart has a supportive Global Ethics Office and Legal Department for employees perplexed about local laws and policies (Wal-Mart, 2013). Wal-Mart’s Initial Business Consideration with Bharti Partnership
Wal-Mart planned to open its stores in India back in September 2012, at that time the company did not officially approach the Indian government for authorization to position stores. According to Scott Price, “We look forward to working with the government of India and state governments to understand the rules that exist for foreign direct investment, and we are committed to evolving and following them in a logical manner that benefits both the Indian customer and our business” (Ahmed, 2013, p. 2).
India’s restrictive rules on foreign firm operations India has a vast and fast moving retail market, which has opened recently to foreign countries. The Government of India has established a series of measures to bring foreign investor in and take a greater interest in the local economy. The Companies Act of 1956 governs companies incorporated or registered in India. The Companies Act allows foreign nationals to incorporate a company in India and hold up to 100% of the foreign equity. The equity is subject to the sector in which the company is established in and will require the consent from either the Foreign Investment Promotion Board or the Reserve Bank of India.
The Prime Minister of India recently has allowed foreign, multibrand retailers to own 51% of the Indian operations. The remaining 49% must be owned by Indian partners. In the past, only foreign recognized investors and non-resident Indians were authorized to invest directly in local shares. Another recent change to Indian’s foreign business policy is that qualified foreign investors can invest individually no more than five percent of the capital of the established company in India. Together qualified foreign investors can invest up to 10% of the capital made and invested within India.
According to an article in a World Bank magazine, Foreign Direct Investment (FDI) is a measure of foreign ownership of productive assets, such as factories, land, and mines (World Bank, 2001). Foreign Direct Investment is an essential aspect in the development and sustainability of India’s economy. It is also an integral part of the global economic system. From April 2008 to July 2008 the Foreign Direct Investment in India was worth an astonishing $12 billion dollars. Not only did India’s investments reach an unprecedented high but also India recorded a 17% increase in FDI incursion.
The increase can be attributed to an improved investment environment, a hearty increase in the economic growth, and opening of telecommunications services. FDI for essentially every product and service can be received into the country through the Automatic Route by virtues of the powers invested to the Reserve Bank of India.
The Foreign Investment Promotion Board recommend approval to the government that can be advantageous to the Indian economy from a macroeconomic standpoint, Foreign Direct Investment is more secure than similar types of capital flows. Equity and short-range obligations in particular have a tendency to be highly unpredictable and risky, plus their part in igniting and adding to the financial problems in the 1990s has been closely analyzed. Developing countries have begun to follow the FDI as a means to promote the export side of business, as opposed to pursuing the product manufacturing for the domestic economy. Foreign investors usually build manufacturing facilities within the host nations and manufacture their products at a cheaper cost.
Foreign Direct Investment also assists the country by enhancing the exports through preferential avenues to markets in the host business’s country. Non-host nation organizations are a key player in respect of the domination in world trade. Multinational organizations account for two-thirds of the sales that come from countries other than India. Foreign affiliates contributed half of China’s exports and 21% of Brazil’s exports. Foreign affiliates accounted for only three percent of India’s export. At the country’s current rate of economic freedoms foreign companies are projected to raise their share of India’s exports. Target Market Blunder: Miscalculation
Because of target market blunders in India, Opening Walmart stores came to a halt because of the slow economy and India’s ineffectiveness to get their local government to persuade foreign investors to support their Walmart retail plans. Due to this ethical dilemma, Walmart, the World’s largest retailer, also said that they were going to end their joint efforts with India to operate 20 wholesale “Cash and Carry” stores because there were problems negotiating with their Walmart retail plans.
Because of this Walmart came to the decision they would buy Bharti’s 50 % stake in the venture and operate independently in India hoping to study more about India’s bumpy retailor part in selling at a retail level that would be reasonable.
This business obligation has been a significant problem for Walmart’s retailers for a long time. This is due to India’s changing configurations and business obligations of what they are willing to do and would not do. India is trying to make their retail market work with Walmart’s retail goals and unfortunately is going nowhere and therefore there is no investments coming in. Other Walmart’s chief executives have come to a conclusion to say that its government regulations requiring foreign retailers to buy 30 % of products from their small local businesses and mid-size businesses were their faltering mistakes for opening consumer stores with other retailers in India (Harris, 2013).
Walmart’s Past Efforts to Penetrate the Retail Industry in India Walmart’s operations had been an overwhelming success in the United States. Its business philosophy of selling low price products and passing the savings to the customer is a proven business model responsible for sustained growth and profitability over the years. Walmart had been through organizational transformations from a local to national stage, and ultimately becoming a giant transnational corporation with 6,100 stores in 15 countries and annual revenue of $469 billion.
Walmart’s international operation generates $135 billion in annual sales (29% of the total revenue) and is the most important source of growth for the company. To maintain its status as a global leader in the retail industry and fulfill its responsibility to shareholders, Walmart is constantly seeking opportunities to explore and believes that the next lucrative frontier with the greatest potential for success is in India. Walmart’s Preparation to Tap India’s Retail Market
Prior to Walmart’s attempt to gain access to the retail industry in India, the firm already had an outsourcing operations there, buying $1.6 billion worth of products (e.g., leather goods, textiles, and other merchandise) for worldwide export and sales (Giridharadas & Rai, 2006).
From a regulatory perspective, the government of India has opened the doors to foreign firms by loosening investment rules in the “outsourcing” sector. However, such opportunity remains elusive in the retail industry because of government’s concern that giant foreign corporation, such as Walmart could devastate the economy by squeezing the livelihood of small-scale businesses, known as “kirana” that are the backbone of the retail trade and entrenched with the Indian culture.
The retail sector in India is diverse, fragmented, and quite different from the United States and other international markets that Walmart had conquered. Retail trade is normally held in small-market places and variety stores where price bargaining is commonly practiced (Matusitz & Reyers, 2010). There are approximately 12 million kiranas stores in India operating, as street vendors, mom and pop stores, kiosk, etc., are often family-owned, and managed by an individual.
The kiranas have several advantages that a formal centric hypermart retail stores could not easily replicate such as individual familiarity, free home delivery, and interest free credit in times of crises. Moreover, because India is a densely populated country, the kiranas often brings the merchandise to the consumers, a convenient feature and competitive advantage. Walmart recognized this challenge and waited for the opportune time to enter the market through research (cultural traits and local taste) and overcoming regulatory restrictions. Finding a Loophole to Overcome Foreign Restrictions
India’s fast-growing retail market has been a long-term goal for Walmart. The company simply cannot disregard the unique economic opportunity to target 1.2 billion potential customers (and still growing at a rate of 20 million per year) whose average annual sales of $400 billion is projected to expand to more than $1.3 trillion by 2020 (Banjo & Jai Krishna, 2013). Undaunted by the government’s restrictive rules, Walmart exploited two gaps where foreign retailers could access the Indian market: capital investments in wholesale stores and franchising with local company. In 2007, Walmart found a local partner;
Bharti Enterprises, Ltd. and formed a joint venture, Bharti-Walmart, where Walmart would be a franchisee and open convenience stores under Bharti’s Easy Day banner while investing its own capital in wholesale stores. Under the partnership terms, Walmart would provide procurement expertise, storage resources, and tap its vast logistics networks, whereas Bharti maintains ownership of the stores. Such arrangements enabled Walmart to penetrate the retail industry and obtain the legal means to somewhat operate a modified version of “buying and selling” business in India.
In May 2009, the joint venture opened their first wholesale store, BestPrice Modern Wholesale, in the city of Amritsar, famous for mostly middle-class population with ties in North America. However, before Walmart could launch its typical “buying-selling” store model, the government intervened by restricting Walmart’s operations as strictly wholesale. Under the wholesale concept, only business owners can join and access to the store is limited to family members and up to three friends (Wax, 2009). The move was criticized as “protectionism” and anti-foreign company. However, the government insists that mediation was necessary to preclude a head-on collision with powerful merchant organization and political parties.
Challenges encountered in partnership with foreign firm: Bharti There are many layers of uncertainties and challenges when doing business in a foreign country like India. Whether the business of choice is retail or services, expect the foreign policies and politics of the country to be strictly enforced. It is very likely that for convenience, the temptation to tread even lightly in minor corruption could result in the demise of a business venture company, partner, and brand name.
As it is, the challenges, and uncertainties are risky enough for any well intended ethical business owner. The United States Foreign Corruption Practice Act (FCPA) as well as the foreign countries business policies are strictly enforced, and the penalties can and usually are steep for any in violation of Foreign policies. Bribery Scandal
Walmart is facing investigations on alleged violation of Foreign Corrupt Practices Act (FCPA) of the United States, which bars bribing officials of foreign governments, in India, and other countries, including China, Brazil, and Mexico. Walmart’s investment in Bharti is under allegations that Walmart may have entered India’s front-end multi-brand retail business two-and-a-half years before the government lifted the ban on foreign investors in 2010. This was in addition to investments in Bharti and Walmart’s joint venture to run wholesale stores under the Best Price Modern Wholesale brand. Retail Business Requires Deep Pockets
Although the Indian government allows up to 51% foreign direct investment (FDI) in multi-brand retail, there are many strings attached. For example, it is mandatory for companies to invest at least $100 million – split between the front and back end operations and source at least 30% of their products from local companies. This creates problems for multinational firms that have global quality standards to adhere to, particularly for retailers in categories like consumer electronics as durables. It basically is not a level playing field compared to domestic retailers.
Low margins and high costs are some reasons the vast opportunities – roughly 90% of the $500 billion retail market are done at one-off mom-and-pop shops, expensive real estate, underdeveloped supply chains and fierce price competition means margins are razor-thin and most gig supermarket operators lose money (Mumbai, October 9, 2013). Policy Uncertainty
Walmart’s direction forward remains unclear regarding major investments without a government decision to revisit foreign direct investment rules, also because of India requiring 30% of its products be sourced from small and medium-size local businesses. “Foreign retailers have objected to that condition and so far no company has applied to set up business in India, including Walmart, Carrefour and Tesco who are seeking clarifications on a host of policy details” (Forbes, October 9, 2013). Singhal said, “The government of India should gracefully acknowledge that the current FDI policy is fundamentally flawed.”
“The government should come out with a simple, more practical policy relating to foreign investment in retail wherein it could, if it wishes to, put a substantial “sourcing” obligation from India (irrespective of the scale of suppliers) for global sourcing requirements of such foreign retailers, He added “this would give fillip to India’s exports and potentially make the manufacturing base more broad-based and more competitive (Forbes, October 9, 2013). Arvind Singhal, head of Technopak, a consultancy said “I genuinely believe that both partners wanted to make the JV work, but sadly, India’s business environment, convoluted policies, and dysfunctional politics just did not allow the business to get established and take off” (Forbes, October 9, 2013). Political Uncertainty
Government announces probe against Walmart’s reported disclosure to the US Senate that it spent about $25 million since 2008 on lobbying activities that included “enhanced market access for investment in India.” Global retailers view Walmart’s entry into India as a test because of the uncertainty about the approval processes and taxation framework for FDI. They have also seen many multinationals retreat from their investment plans in India.
“Foreign investors are already spooked by worries over a number of issues such as pervasive corruption, red tape, tax battles, decade-low growth, and a weak currency” (Firstpost, October 14, 2013). Also, Saloni Nangia, the president of management consultancy firm Technopak, said “The Indian government needs to make this country investment-friendly. So far it has been pure posturing.” The Solvency of Joint Venture
The shared assets between Bharti and Walmart could create a problem. They have common supplies, real estate must be bunched together for cash-and-carry and retail operations, and even shared personnel for certain functions. It will take them time to divide the assets and focus on business. “There are around 5,000 supplies between them and around 100 pieces of property were leased for future use by the two companies” (Delhi, October 23, 2013). Foreign Corrupt Practices Act
Another challenge is to help Walmart clean up its act in complying with the Foreign Corrupt Practices Act (FCPA). The United States tough enforcement has pushed Walmart to admit in 2010 that its representatives in Mexico had bribed officials to accelerate building permits for new stores. “Walmart is forcing changes in the corrupt practices of India where it hopes to become the largest retailer within a few years” (Abstract, How a Walmart struggle in India shows world progress, April 2, 2013). Also, Walmart suspended several employees, including the chief financial officer on its Indian business, as it investigates alleged FCPA (Forbes, October 9, 2013). Recouping
How Walmart will recoup the $100 million loan to Bharti is unknown. It is reported the $100 million could be converted into a stake in the JV retail unit (Investor’s Business Daily October 18, 2013). Bharti is insisting on getting this waived off, sources said. Another possibility is that if the violation is confirmed, the penalty could be as high as $300 million. Conclusion
Since opening its first store over 50 years ago, Walmart has continued to sell its items for the lowest price, a promise made by the owner Sam Walton.
The Walton family’s continual success in Walmart stores has stretched through 27 countries, which grows yearly. The company prides itself in learning and following each country’s laws and values its partnerships made with foreign firms like Bharti. Although the company is not a perfect one, it continues to grow and build off of the small town concept of helping people anytime, anywhere.
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