Bharti Enterprises and the world’s largest retailer Wal-Mart on Wednesday decided to break up their almost six-year-old 50:50 partnership in India which runs cash-and-carry stores. The development, though expected for quite sometime now, is still ironical as it comes at a time when the government has opened the multi-brand retail sector to foreign investment and the Bharti-Walmart JV was expected to be the first to venture into this area.
In fact, Bharti Enterprises vice-chairman Rajan Bharti Mittal had said in September last year, when the government had first opened up the multi-brand retail sector to foreign investment, that the two extending their JV to the front-end stores was a ?natural progression of the partnership?.
However, strains in the relationship had emerged later when Wal-Mart got embroiled in bribery charges, leading the government to order an inquiry into the matter. The charges led it to sack its CFO and, subsequently, also saw the easing out of its India CEO Raj Jain. The CFO was later hired by Bharti Airtel. Wal-Mart is also embroiled in an enforcement directorate probe into its $100-million investment in Cedar Support Services, which is a subsidiary of Bharti Enterprises and the holding company of Bharti Retail, through compulsory convertible debentures. Bharti, however, said that the break-up of the joint venture was purely a business decision and had nothing to do with the corruption charges against Wal-Mart. It said that all investments were done in compliance of government guidelines.
The lid on the suspense over the future of the partnership was lifted recently when Bharti Group chairman Sunil Bharti Mittal said in Johannesburg that he expected Wal-Mart to take a decision about the future of the JV firm within October. Subsequently, Wal-Mart Asia CEO Scott Price said in Indonesia on October 6 that a partnership in the front-end stores was not ?tenable? at this point of time. However, the company was committed to its back-end, cash-and-carry business.
Though both the companies have reiterated their commitment to the businesses they are in, analysts maintain that both need a partner if they want to grow in their respective businesses. Wal-Mart can have 100% holding in the cash-and-carry business, but it does not make sense for it to remain restricted to it in a growing market like India. For front-end stores, it needs an Indian partner. Theoretically, Bharti can create an entire retail network on its own, but a foreign collaboration would help it with both finances and domain expertise.
The other two global retail majors ? the UK-based Tesco and France’s Carrefour have token presence in India and are yet to finalise their plans for front-end stores with an Indian partner. While Tesco provides technical support to Tata Group’s retail venture Star Bazar, Carrefour has a couple of wholly-owned cash-and-carry stores in India. Interestingly, before tying up with Wal-Mart in 2007, Bharti had also explored partnership with the two.
Industry sources said that it did not make sense for Bharti to stay invested in the back-end business with a company that would not participate in front-end stores. The reason being that any Indian company can have up to 51% foreign partnership in its front-end retail venture only if 50% of the initial investment goes in for creating back-end infrastructure.
According to a joint statement issued by the two, Wal-Mart would acquire Bharti?s stake in Bharti Walmart, which would give it 100% ownership of the Best Price Modern Wholesale cash-and-carry business, which runs 20 stores. Bharti will also acquire the CCDs held by Wal-Mart in Cedar Support Services, a company owned and controlled by Bharti.
Going forward, the statement said, Wal-Mart plans to continue to grow the cash-and-carry business while working with the government and interested stakeholders to create conditions that enable foreign direct investment (FDI) in multi-brand retail. Bharti Retail will continue to operate ?easyday? retail stores across all formats and invest in and grow the business.
Bharti was the first Indian firm to tie-up with Wal-Mart in 2007, around the time the retail sector was opening up to organised players in the country, promising immense growth potential. Bharti’s rival, Reliance Industries, with which it had competed fiercely in the marketplace in the telecom business in 2003-04, had also got into the retail sector around that time.
Reiterating its commitment to the retail sector while scotching all speculation that it may exit the business, Rajan Bharti Mittal said, ?Bharti is committed to building a world-class retail venture and will continue to invest in Bharti Retail across all formats. We believe that with our current footprint of 212 stores, we have a strong platform to significantly grow the business and delight customers.?
In similar vein, Price said, ?Given the circumstances, our decision to operate independently will be beneficial to both parties. Through Wal-Mart?s investment in India, including our cash-and-carry business, supply chain infrastructure, direct farm programme and supplier development, we want to serve India and its people, and continue to make important social and environmental contributions to the country. Wal-Mart is committed to businesses that serve our members and provide good returns for our shareholders, and we will continue to advocate for investment conditions that allow FDI multi-brand retail in India. We wish Bharti well as they grow their retail business.?
