The world's largest retailer, Wal-Mart, has inked a 50-50 joint venture with Bharti Enterprises for a wholesale cash-and-carry business in India that will roll out ten to fifteen such outlets over the next seven years.
The agreement, signed Monday has set the stage for Wal-Martâ€™s entry into the worldâ€™s second fastest growing market. The two companies had signed a memorandum of understanding last November.
The first cash-and-carry outlet for wholesale retailers will open by end-2008. The joint venture is expected to generate employment of at least 5,000 people over the next seven years.
While current government regulations permit 100 percent foreign direct investment (FDI) in cash-and-carry and logistics, it is banned in front-end retail. Hence, Bharti is likely to manage the front-end of the retail business, while Wal-Mart would take care of the supply chain, logistics and other back-end operations.
Last November, Bharti Group Chairman Sunil Mittal said the agreement was â€œa partnership of equals. Big investments are in the pipeline.
Before the Wal-Mart deal had been announced, Bharti was had also been in active discussions with British retailer Tesco and Carrefour of France before talks with them failed.
India's booming retail market, estimated at about $300 billion, is growing at a brisk pace of 30 percent per annum and is largely dominated by more than 15 million unorganized retail stores across the nation with large air-conditioned stores remaining a rarity.
Rising middle class incomes and an increase in demand for branded products are driving the growth of retail business in India.
Nevertheless, organized retailing, selling through company-owned network stores, currently totals about $8 billion or less than 5 percent of trade in the country.
The government has so far allowed 51 percent foreign direct investment (FDI) in retailing by companies which sell only a single brand such as Reebok, Nike, Nokia or Benetton.
Both companies declined to comment on projected investment plans, turnover or possible revenue realization from the business.
However, market analysts have estimated that it may cost anything between $30-200 million, depending on location, land prices and scale of operation.
Besides the wholesale cash-and-carry business, Bharti Enterprises is also planning to invest up to $2.5 billion to set up a chain of convenience stores, supermarkets and hypermarkets under the name Bharti Retail, a 100 percent subsidiary of Bharti Enterprises.
Bharti Retail has signed a franchise agreement with Wal-Mart for technical collaboration and training of human resources. Wal-Mart's expertise lies in cutting costs with a strong and technically superior supply chain.
The new joint venture company will source 90 percent of its goods from India, with the rest being imported.
According to market observers, Wal-Mart is also biding its time and is keen to enter front-end retailing in the future if the Indian government relaxes its FDI policy.