Wal-Mart: Can it Handle the Spice

Can the world's largest retailer conquer the Indian marketplace?

In September 2012, the Indian government opened the floodgates to its country’s booming consumer market by agreeing to make its retail sector more accessible to foreign giants such as Wal-Mart and Ikea. The move came as a pleasant surprise to foreign firms who now, for the first time, will be permitted to operate wholly-owned subsidiaries in India. Significant upside potential exists given that organized retail, which refers to operations undertaken by licensed businesses, represents less than 5% of the Indian market. In aggregate, the retail sector generates more than US $500B in sales, driven by India’s growing middle class’ increasing demand for Western goods. Retailers interested in entering India will be forced to answer a difficult question: how do we persuade the Indian consumer to purchase goods at a supercenter instead of from their local street vendor?

Wal-Mart hopes to be an integral part of this market shift by being the first foreign retailer to enter India. The retail market is growing at 12% per year and is free of Wal-Mart’s familiar competition; there is an opportunity to gain a first mover advantage in the wake of market liberation. Over the past few months, the media has also taken an optimistic stance on the proposed expansion. Bloomberg attributes forecasted success to a high population density, and the Wall Street Journal expects Wal-Mart to capitalize on the fragmented nature of the competition. Success, however, is far from certain. Wal-Mart must remain cognizant of the significant headwinds it will face in this unfamiliar market when determining which market entry strategy will maximize value, without compromising its tolerance for risk.

Wal-Mart’s Current Value Proposition

In North America, Wal-Mart offers a wide range of products to its customers at “Everyday Low Prices”. Thanks to its state-of-the-art supply chain management system and enormous size, Wal-Mart is able to negotiate the best prices from suppliers. Typically when entering new markets, Wal-Mart has sought to acquire or collaborate with a large firm in the target country to attempt to quickly replicate its supply chain advantage. This strategy is best illustrated through Wal-Mart’s $2.4B acquisition of Massmart in South Africa. This acquisition provided Wal-Mart with insights into South African consumers’ preferences, while granting it access to prime real estate and well-established distribution channels. Wal-Mart’s 1998 expansion into Germany failed because they neglected to address the concerns of German consumers, and were forced to exit eight years later. Wal-Mart has generally enjoyed success wherever it has been able to understand the local culture, and adapt its value proposition accordingly.

Previous Experience in India

Wal-Mart first entered the Indian market in 2006 through a joint venture with Bharti Enterprises, one of the largest Indian conglomerates. Government restrictions prevented Wal-Mart from operating in retail, so instead it opened wholesale or “cash and carry” stores, targeting the business-to-business segment. In cash and carry stores, customers pay for goods immediately in cash; no credit terms are offered. Wal-Mart gained a basic understanding of the Indian consumer through this venture. Going forward, Wal-Mart is looking to take advantage of changes in government policy and move out of the small and crowded wholesale segment. If Wal-Mart moves into retail in India, the question must be asked: should Wal- Mart continue to operate with partners, or can it succeed on its own?

Wal-Mart’s Potential Challenges

1. Inability to Compete with the Local Vendors

The retail sector in India is primarily composed of neighborhood “mom and pop shops”, known locally as “kirana” stores. Essentially, they are street vendors. These vendors have a personal, long-standing relationship with their customers. They have gained the trust of the consumer with respect to price and freshness, values that are deeply embedded in the Indian consumer’s buying behavior. Wal-Mart would be unable to compete with these street vendors in the grocery space due to the “kirana” stores’ negligible fixed costs and daily inventory replenishment. Furthermore, these vendors offer value added services such as home delivery and a short credit period without interest – services that would be a deviation from Wal-Mart’s business model. Wal-Mart cannot compete with the convenience of the ubiquitous “kirana” stores.

The players that currently compete in India’s orga- nized retail market include Reliance, Spencer’s, and Big Bazaar, each of whom sell groceries and dry goods. Although these companies have adopted an aggressive growth strategy in Mumbai, India’s largest city, none have developed significant brand equity due to their inability to provide a product mix or price level that can compete with local vendors.

2. Preferences of the Indian Consumer

There are a number of key cultural differences between the preferences of the Indian consumer and the typical Wal-Mart customer. Wal-Mart customers buy in bulk, visiting infrequently. However, Indian consumers prefer fresh food, and visit a store almost every day. They also have limited access to personal vehicles or public transportation and, as such, prefer to purchase hard goods in small, transportable quantities. This would not support Wal-Mart’s current “one-stop-shop” business model.

In addition, there is a perception among the older generation in India that bigger stores charge premium prices and sell exclusive products, while smaller stores sell average products at a low- er price. This suggests that Wal-Mart’s big box image, as is, may limit its success selling generic goods to the Indian consumer.

3. Booming Real Estate

An exploding Indian population and rapidly expanding public infrastructure has sent real estate prices in metropolitan areas skyrocketing. Given the floor space required to operate a big box store, Wal-Mart’s success would be highly dependent on the per square foot cost of real estate it is able to acquire. Due to previous government regulations, Wal-Mart lost the chance to bid for prime, low-cost urban real estate to its Indian competition.

Historically, Wal-Mart has set up its stores on the outskirts of cities where real estate is proportionately less expensive. This strategy could be risky in the Indian market, as consumers have limited access to transportation and would be dissuaded by the need to travel long distances. Thus, Wal-Mart may be required to incur high real estate costs, which will increase the size of the market-entry investment, and put downward pressure on its profit margins.


4. Lack of an Organized Supply Chain Management System

Since Wal-Mart’s competitive advantage is its supply chain superiority, entering alone would necessitate a large investment to establish distribution systems from scratch. Corruption, distrust, and a general lack of transparency throughout Indian supply chains has required many retailers to sell goods through middlemen, driving down retailers’ margins. Getting the necessary products to stores without delay would be a significant hurdle to Wal-Mart’s success given the scattered logistics. According to McKinsey, 40% of fresh produce in India goes to waste due to the lack of investment in back-end infrastructure, such as refrigerated systems. Conversely, established players in the market have already built supplier relationships with farmers and manufacturers, streamlining distribution and reducing waste. Also, in the dry goods space, only a few players have gained access to quality distribution systems. Gaining access to these networks presents a sizeable challenge, given that in large part they were established by a small number of players looking to gain a sustainable competitive advantage.


Wal-Mart does not need to partner with a local player to better understand India’s socipolitical fabric and establish effective supply chains, but a calculated entrance strategy is nonetheless necessary. Wal-Mart has gained a basic understanding of the Indian consumer through their Bharti partnership, and could ac- quire local management knowledge by hiring directly from the local labor pool. The primary purpose of a domestic partnership would be to decrease risk, reduce time to market, and signal to the Indian consumer that Wal-Mart is willing to make a commitment to the community. These requirements for entering the Indian market can all be achieved through proper strategy execution.

First, in order to overcome the concern of high real estate prices, Wal-Mart should look to acquire prime space from an established player, such as Future Group’s Big Bazaar, or through the continuation of its wholesale joint venture with Bharti. Big Bazaar has attractive, developed supercenters across the country, and Bharti’s real-estate subsidiary owns prime real estate in Delhi, with upcoming projects in Bangalore and Patna. This strategy would reduce time to market, allowing Wal-Mart to secure its first-mover advantages amongst global retailers. If entering alone, Wal-Mart would also have to reduce its average store size of approximately 200,000 ft2 to better align with the 10,000 ft2 unit sizes that are available in most Indian metropolitan areas.


Second, Wal-Mart should develop a distinct value proposition in order to draw consumers into its stores. As Wal-Mart cannot compete with local vendors on price, it should distinguish itself by highlighting its differentiated merchandise and consumer experience. Wal-Mart’s competitive advantage, relative to domestic big- box stores, would be access to global products at an affordable cost.

Wal-Mart should look to enter emerging marketplaces such as Ban- galore and Hyderabad, where competitors are less developed and rental prices are trading in-line with what Wal-Mart would see in its other successful markets. This geographic segment, which contains a proportionately large, young middle class who support the shift to a new-world economy, have also shown an increased willingness to change their buying behavior in favor of Wal-Mart’s classic value proposition. Wal-Mart’s target market should be young families, who purchase large baskets of Western goods in regular intervals. Although these markets are not as large as the metropolitan areas of Delhi or Mumbai, they still have the necessary infrastructure to enable the provision of inventory and supplies.

Being an early mover could prove to be an advantage, but only if Wal-Mart is able to learn from its market-entry failures in countries like Germany, where it refused to adapt its market entry and positioning strategies to the preferences of the local consumer. If Wal-Mart succeeds in the Indian market, it would not only lead to the transformation of one of the world’s largest retail markets, but could aid Wal-Mart in entering neighboring emerging markets, such as Sri Lanka and Bangladesh, offering further opportunities for sustained growth.