Following the approval of Foreign Direct Investment (FDI) in the multi-brand retail sector in India, retail giant Walmart (WMT) has announced plans to launch its first store within 12 to 18 months through its joint venture with Bharti Enterprises, but the high cost of real estate may pose a big challenge for the low-price retailer.
With the key goal of keeping retail prices low, Walmart saves shoppers at least 15 percent on a typical cart of groceries, Firstpost has noted.
However, the retail giant does feel the pinch of the real estate costs in large cities where FDI has opened up.
Speaking to reporters after launching the joint venture's third store in the state of Andhra Pradesh and 18th in the Indian subcontinent, Raj Jain, Walmart India president and Bharti Walmart MD & CEO, said: "The largest challenge has to do with real estate in large cities where FDI has been opened up. Unfortunately, the availability and cost of real estate in India is very high and we are a low price retailer. If we pay too much of rentals, we cannot offer great prices to our customers," according to a leading Indian business daily.
Reportedly, the real estate costs stumped Walmart plans in New York City too because despite securing an opportunity to open a store in eastern New York City, it could not put plans into action as real estate prices were too high to bring down prices for customers, Firstpost has stated.
Walmart is well-known for its hypermarkets spread over 100,000 to 200,000 sq ft, located outside the city, where rents are low. But such a strategy may not take off within the big metropolis in India. The huge cost of real estate within the cities will force the big shops to the outskirts of large metros.
The Indian situation is peculiar in a way Rajiv Lal, a professor with Harvard Business School, explained to Firstpost earlier: "It’s not easy to open a 1,50,000 square feet store in India. That kind of space is not available. They can’t open these stores 50 miles away from where the population lives. People in India don’t have the conveyance to go and buy bulk goods, bring it and store it. They don’t have the conveyance and they don’t have the big houses. So it doesn’t work.”
However, retailers such as Carrefour and Tesco do operate in malls. “In the US everyone is used to proper highways so they do not mind traveling 30 miles for shopping. It is also to do with the size of malls. Everyone drives a car. Whereas in India you have shopping complexes, not malls,” Anshuman Magazine, CMD, CB Richard Ellis, told a leading Indian business daily in an interview.
“Currently, some retailers are cash-strapped and this will provide a sort of bailout option to them. Overall, the investment by local and new international retailers that are likely to flow into the sector will definitely also take the form of investments into real estate at the front end in terms of retail store space and of the back end in terms of better quality warehouses,” Pankaj Renjhen, managing director – Retail Services, Jones Lang LaSalle India, told Firstpost.
All this shows how the success of Walmart is going to be monitored by all retail giants who want to expand their footprint in India.