Sam's Club in Bollywood

It seems that American retailers and superstores can't get enough of developing economies. While few expect to turn the profits that they do in the West anytime soon after launching ventures in the East, Central Europe and Latin America, many still hold out hope for massive upside down the road due to the rising middle "spending" class in many parts of the developing world. And when it comes to global ambitions, Wal-Mart is about as serious as it gets -- at least from a big box perspective. They're even willing to pursue money losing opportunities and pull out of markets when necessary. According to a recent Business Week article, they're finally getting their strategy in place in India. For many retailers, India poses a number of challenges relative to China and other areas. First, companies most sort through all the red tape and bureaucracy that comes with the country and its many regional states. But they must also deal with challenging logistics, especially considering how India's rail and road networks are about as bad as it gets for a fast growing economy.

Still, Wal-Mart has high hopes. According the article, Wal-Mart "has finally signed an agreement with its joint venture partner Bharti Enterprises in New Delhi. Together, they will set up 15 wholesale cash-and-carry stores over the next seven years. Focusing on the wholesale segment is Wal-Mart's best immediate option, given that India restricts direct foreign investment in consumer retailing for the most part. So, this is something of a back-door move by Wal-Mart in India, and it could be a smart one if India's retailing sector is eventually opened up to foreign competition." In my view, working with a partner is smart for a number of reasons, one of which is they'll handle all the local bribes required to make things happen in India without dirtying Wal-Mart's hands in such dealings.

But pursuing the wholesale strategy will certainly place an even greater emphasis on procurement and logistics for Wal-Mart, given the demands of local businesses who will not accept stock-outs and the challenges of managing a high-turn, low SKU environment of warehousing formats relative to retail ones. In addition, businesses, unlike consumers, may be less willing to tolerate substitute products when branded ones are not available (for one reason or another). On top of this, the large volume format of wholesale stores will also force Wal-Mart's India operations to invest in the warehousing and equipment (e.g., forklifts) that still do not predominate in much of the developing world where labor still often serves in place of machinery from a logistics, distribution and warehouse management perspective.

Accomplishing these feats will be all the more impressive in India not only given the countries logistical challenges, but also the intended scale of the operations. According to Wal-Mart, "a typical facility will stand between 50,000 square feet and 100,000 square feet, and sell a wide range of products including fruits and vegetables, groceries and staples, stationery, footwear, clothing, consumer durables, and other general merchandise items." I'm certainly hoping for the best for Wal-Mart as it goes down the wholesale path in India. But if I were gambling that they'll pull off the procurement and supply chain issues without a hitch, I'd fold my cards before getting in over my head. Just as Wal-Mart already did in Korea, China and Japan.

Jason Busch

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