Walmart's Entry Strategy for India Assessment Answer

Walmarts Entry Strategy for India

The retail sector has undoubtedly has driven economic boom across the globe. The impact of this economic growth is evident in both developed and developing countries. Asian countries such as China and India have witnessed the change and growth due to their vast and ever-growing retail market. To take advantage of these potential markets, Walmart planned to go global and expand its operations in the retail market of Asian countries including India. One major reason behind Walmarts exploring international market is stiff competition from its domestic market. Prior to coming to India, Walmart has expanded its business in countries like Mexico, Canada, Argentina and Brazil through acquisitions, joint ventures, Greenfield operations, and wholly owned subsidiaries (Hunt, Wattsand Bryant2018). These countries were domestically close to the company and were being managed by the company efficiently. Walmarts plan to exploit the Indian retail market is due to the rising income of India and increasing consumer market. Growing population and increasing spending power of middle class has also attracted Walmart towards Indian retail sector. The segment has started using internet and mobile phones extensively (Walmart 2019). The objective of this essay is to critically analyse Walmarts international strategy to enter Indian retail market. Implications of the international strategy adopted by Walmart will also be analysedin the essay in order to determine the accuracy and appropriateness of the decision taken by the company. In the following paragraphs, the concept of GDP and FDI will be discussed so as to evaluate the impact of FDI on GDP. FDI in the context of India will be discussed and the evaluation of Walmarts operation will also be explored. The overall impact of the international strategy of Walmart adopted to enter Indian market will be evaluated in the conclusion.
Foreign direct investment is an investment made by a foreign company or an individual in a host country. In India, the foreign direct investment (FDI) policy is regulated under the Exchange Management Act (FEMA) 2000. This is administered by the Reserve Bank of India (RBI). FDI has a crucial role to play in the growth and development of a nations economy. With the inflow of capital through foreign investment, the country can strengthen its infrastructure, technology, education, and employment (Havrylyshynand Alikhani2016). It also acts as a source of acquiring technological advancements and accumulating foreign exchange resources. In India, RBI has the authority to intervene in the foreign exchange market so as to ensure that there will not be adverse movement takes place. Its intervention also supports the economy by stabilizing foreign exchange rates. Ultimately, it provides a stable and favourable economic environment for development. FDI promotes international marketing network and flow of information in order to support export-oriented activities. By introducing investor-friendly policies, India has open entries for trading opportunities for foreign investors coming under the automatic route. These foreign investments do not require prior approval from RBI for performing their trade in India (Loeb2013). When India reformed its rules for FDI, it was beneficial for Walmart and it started spanning its roots in the Indian retail market.
Nations with low and middle per capita income have been labeled as an emerging economy. These emerging economy nations have 80 of the world population. As per World Bank (n.d.), approximately 20 of the world economy is from the market of these emerging economies. India is one of the emerging economies and it is growing at a rate of 7 per year. In 2005-06, its gross domestic product reached 8.1. According to the Foreign Direct Investment Confidence Index (FDICI), the Indian market is the most favoured destination for foreign direct investment (FDI). Not only that it has the largest market for the potential customer but it also has a protected industry. India has a huge capacity to attract foreign companies to invest and the government is also encouraging big players from the foreign market. However, the Indian government does not allow FDI in the retail sector as per the protectionist nature of the government. Though, it has allowed companies with a single brand with 51 of equity partnership with the domestic player (IBEF2019). With an array of changes in the regulations and stimulation of foreign investment has further accelerated the growth of the Indian economy. In order to protect local suppliers, India has limited the entry of foreign companies by allowing them only 51 of equity partnership. Political parties such as Trinamul Congress refused to come at consensus with the government on reforming FDI. Along with this, Indian state Tamil Nadu has stoutly resisted invasion of MNC in the retail sector.
This stand of political parties and strict FDI policies have been criticized as it has not only put restriction on single and multi-brand retailing but have also reduced employment opportunities (IANS 2014). According to Goldin, Reinert and Beverinotti (2012), improvement in the globalisation processes contributes in the development of the nation and also alleviates poverty. India, by putting hold on its FDI policies is actually hindering the growth and development of the nation. According to Porter (2018), economic liberalization is important to overcome the national budget deficit. These procedures are essential to bring change and control public expenditure. By making certain shifts such as deregulations and knock-ons of the policies, impact, and benefit of the policies is maximized. Walmart has identified a potential market and the Indian economy has experienced growth with its entry. In February 2019, changes in the FDI policies will change the business model of marketplace entities. According to Gupta (2019), the inventory of the vendor will be controlled by a marketplace entity. E-commerce marketplace has to provide fulfillment, logistics, warehousing and payments and finances to vendors as well. In addition with this, e-commerce marketplace has to furnish an auditing certificate to RBI every year in the month of September. According to Mankotia and Anand (2019), the change in FDI policies are considered as obligations on the e-commerce marketplace.
According to Havrylyshyn and Alikhani (2016), the theory of comparative advantage emphasizes that if a nation is producing most of the goods at a low cost than the other country they can develop trading relations with each other. Their trading terms will fetch benefit and are also favourable for relative efficiency. Free trade is supported under the comparative advantage theory provided lower international trade barriers and tariffs. Realizing the benefit, the Indian government has also reduced trade restrictions and encouraged FDI inflows which accelerated economic growth and set a pathway for Walmart (ABD). Walmart has taken advantage of the change in the FDI policy of India and has planned a joint-venture with Bharti in the year 2007(Walmart2011). This decision was then criticized by the market researchers.
Case Study- Walmarts and Flipkart
Merger and Acquisition is a part of the international strategies used by companies to expand their business and capture the potential market. Deal between Walmart and Flipkart is one of the biggest deals in the e-commerce sector (Flipkart 2019). Walmart has acquired 77 of shares of Flipkart by paying 16 billion dollars. Flipkart and Amazon are leading e-commerce portals operating in India. Amazon is a global leader in the retail sector and Walmart wants to compete with it in order to stay ahead. Walmart had two options to expand its business, either China or India but Walmart decided to enter India because it has a great potential than any other country. Customers in India preferred Flipkart over Amazon and the company is rapidly growing every year. However, Walmart earlier failed to settle its joint venture with Bharti in India due to strict FDI policies. Back then in 2008, BhartiWalmart Private Limited was a joint venture between Bharti Enterprises and Walmart to develop a retail chain which will serve small retailers. However, this venture did not last long and decided to part their ways. As per Loeb (2013), Bharti agreed on managing its Compulsory Convertible Debentures which is owned by Bharti and Walmart will continue to serve Indian customer through cash and carry business. Reason for the fall of this joint venture is the requirement of sourcing 30 of small suppliers as per the policies of the Indian government which Walmart was not able to (Worstall 2016). In 2011, when FDI policies are reformed, Walmart decided to enter once again in the Indian retail sector. Indian government has improved FDI policies to open avenues for foreign investors.
The market place model suggested for e-commerce enables foreign investors to interact with sellers where they can perform a transaction as well (Laudon and Traver 2016). Walmart identified this change as an opportunity and entered the Indian e-commerce to give tough competition to Amazon. The new market place model has given an easy opportunity to Walmart to enter in the Indian retail sector. Promoting direct selling is now easier for the organisation and there is no chance of deviating from complying with the FDI policies. Prior to this, Walmart has also explored Chinas online grocery market in the year 2011 where it could not perform well. Investors of Walmart expressed their disagreement of its venture in India due to previous failures but they also knew that it is the only way to compete with Amazon. According to IBEF (2019), the retail market segment of India is imbalanced due to the low market share of organized retail stores. Local retail shops are much preferred in India however, this is set to change. Growth in mobile phone use / access to internet and data on the growth expected from the e-commerce sector (Walmart India 2019). For Walmart, this was not an issue as developed nations like the US too have the similar scenario of structures and unstructured retail stores. However, with the emergence of retail chains such as Walmart, Sears, and McDonald, the trend has changed and people started purchasing stuff from structures retail stores (Bose2018). As per Kalyani (2018), customers in India still prefer cash and Flipkart offers the facility of Cash on Delivery (COD) to the customers which are an advantage for Walmart and it can anticipate growing and making profit in the Indian E-commerce sector.

Indian government by bringing economic reforms paved the path for economic growth and stable economic liberalization which also improved its comparative advantage. After this joint venture, Walmart also acquired 77 stake of Flipkart in the year 2018. In 2012, the ruling government has liberalized government policy by permitting 100 FDI in the wholesale cash and carry business. However, it also has restrictions associated with it as well such as spending 50 in building back-end infrastructure and sourcing 30 of the requirements locally. The marketplace model for e-commerce provides a platform to the buyers and seller. With this model sellers can interact with customers and buyers can conduct a transaction. This has made entry of Walmart easy and possible in Indian retail sector. It can now easily promote direct selling and avoid failure in complying with policies. Change in FDI policy has helped Walmart in camouflaging in the Indian market. Economists of India believe that this type of entry is unfair and also lacks transparency because it is allowing FDI through multi-brand retail which was earlier was prohibited (Arora 2017). By allowing 100 FDI in MBR, the government can make the policy clear and sort artificial distinction in the policy.
The 16 billion investment made by Walmart in Indias Flipkartwas not appreciated by the companys investors. Post this acquisition, retail shares of the U.S. has seen a fall of 4. As per Ninan (2018), it is the largest transaction in the history of India and its impact will not immediate. The company is waiting for the long-term association with Indian retail sector with this step. Walmart has targeted 1.2 billion people through this acquisition and is all set to serve the market with its quality products and established supply chain. However, gains are likely to occur when complicated and restrictive government rules will be made flexible. Referring to the previous joint venture in India with Bharti, investors of Walmart has doubts related to this acquisition. According to Hunt, Watts, and Bryant (2018), Walmartis already doing fairly well in its domestic market and its expansion in other international market has also proved beneficial for the company, however, Indias FDI policies are not favorable for it to operate here. Its deal with Flipkart is believed to give a new start. Indian organized retail sector has a lot of scope where Walmart can bring changes and improvements. This will not only bring profit to Indian economy but to consumers as well. They will be able to explore more products at competitive prices offering good quality.
As per the reports shared by Flipkart, in 2017, its market value of its sales was at 7.5 billion generating revenue of worth 4.6 billion. This shows only 50 of growth and reason for slow growth rate was due to its highly discounted strategy. Getting support of 2 billion from Walmart, Flipkart will be able to expand its product offerings and efficient supply chain of Walmart will reach distinct locations too (Gattorna 2017). Flipkarts supply chain is spanning over 800 towns and cities. Currently, it has two fashion retail sites along with a mobile payment app facility which Walmart will further utilize. Walmart is planning to expand the product range by including electronic goods, mobile phones and apparels in the existing collection. To give its attention more on the Indian retail market, Walmart has reduced its current operation in the U.K. and Brazil. The most important reason behind Walmart investing in Indian retail market is to explore online market of India (Ninan 2011). U.K. and Brazil considerably have a brighter future for Walmart. In addition to this, Amazon was also speculating for Flipkart. Walmart entered the Indian market right at the time when Amazon has come up as a potential rival for Flipkart. The comparable valuation of Amazon is of 20 billion and instead of joining hands with Amazon, Flipkartopted for Walmart.
Walmart is paying more attention to the Indian retail market this time as compared to any other foreign market. As per Thomas (2017), Walmart Indias President KrishIyer has stated in one of the interviews that India has been made a priority market by Walmart. This will call for more resources and talent to meet the requirements. More resources mean accelerated operations and investments in the back-end to strengthen the supply chain of the new market. The company has also presented its improved market-model. It has introduced the first fulfillment center in Mumbai, which is considered as an improvement on the cash and carries store model. Currently, Walmart has 20 cash and counter stores and planning to open 50 more stores in India by the end of 2021 Thomas 2017). Setting up of a fulfillment center was quicker than full-fledged cash and carry store. Walmart has built a fulfillment center on 4-acre land in Mumbai within 60 days while setting up a CC took it more than two years. This newly launched model is profitable, cost effective and time saving for Walmart India. As per Iyer, the capacity utilization at FF stores is profitable which is130. One of its examples can be seen in Punjabs Zirakpur district. Moving towards the sales profit made by the company in the year 2016, Walmart has managed to generate revenue worth Rs. 3,996.8 crore. The net loss of the company was 140.4 crore which was half of the previous report (Thomas 2017).
In the year 2018, it again underperformed and the international business only managed to contribute the quarter of its total revenue. As per Bose (2018), Burt Flickinger, Managing Director, has stated that Walmartreacts slowly in the issues related to international business. After realizing this, they have now started taking corrective measures and aligning their resources which can be of help in taking quick decisions. This approach will also include taking a decision as per the traditional approach of Walmart where it believes in building a business on its own. Walmart has made various international blunders including an unprofitable bet on an online retail chain in China, then its joint venture with Bharti, and in UK AldiInc and Lidl has given it a tough competition. However, its deal with Flipkart looks profitable because for investors this would be the best chance for them to beat Amazon (Bose 2018). Indian market is large enough for foreign marketers and Flipkart is Walmarts largest acquisition till date. With its proactive approach and well-thought plan of action, Walmart will be able to manage the acquisition in India. Reformed and reduced FDI regulations have given it a chance to explore the Indian retail market once again taking e-commerce as a platform to attract maximum customers will provide Walmart a fair chance to serve Indian customers.
FDI policies of India have seen changed to encourage foreign investments. This has not only to boost the growth of the economy but has also given an opportunity to foreign companies like Walmart to explore the potential market. Developing countries like India had limited scope of development and trading opportunities, FDI has made it possible for them to build international relationships (Pt Joseph 2015). Walmart has taken advantage of foreign direct investment policies of India and opened its retail chain with Bharti but FDI restrictions did not the business flourish and both decided to part ways. The regulation under which a foreign investor is required to source 30 of resource locally has made it difficult for Walmart to continue in India. With a change in policies and allowing 100 MBR in e-commerce, Walmart again entered the Indian retail market and this time it acquired Flipkart. Flipkart has two options, either to choose Amazon or Walmart, and it opted for Walmart. Investors of Walmart initially did not approve of this decision but lately, they realized that this will be an opportunity for them to beat Amazon in the international market. Walmart is known for its international blunders. Most of its decisions went wrong. Its investment in Chinas retail chain got a loss for the company, along with the Bharti in India. However, its acquisition of Flipkart had been anticipated to bring profit to the company. FDI of India is largely responsible for the loss of Walmart in India which can be taken as its inaccuracy of taking a decision. While expanding in international business it is required to delve into the market condition and trading regulations so that the company can prepare itself beforehand. Walmart having considered and explored all the effects and impact of FDI could have saved it from previous losses which it has implemented while acquiring Flipkart.
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