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The Wal-Mart Flipkart deal has become historic in many aspects. Firstly, this is the biggest, most valued takeover of a company in India. Also, it gives entry to Wal-Mart to enter India via the e-commerce route. Many believe that this deal will pave the way for increasing globalization by increasing the FDI limit for the retail sector in India. Hence, the sentiment around the deal has generally been positive. However, many segments of the Indian population, particularly interest groups associated with political parties have started raising the protectionist sentiment.
In this article, we will try to understand the reasons behind this protectionist sentiment and also discuss what Wal-Mart can do to silence them.
India is the second largest consumer market in the world. It is amongst the fastest growing markets. Hence, this is not a market that a company of the scale of Wal-Mart can just ignore. Also, Amazon which is Wal-Mart’s most significant competitor has a thriving business in India. The company is quickly gaining market share. Flipkart was the only real competition to Amazon. Wal-Mart saw the Flipkart deal as an opportunity to make inroads into an attractive Indian market as well as to get even with a fierce competitor. Wal-Mart had earlier tied up with up Bharti retail to open brick and mortar stores but had failed to run them profitably.
Hence, Wal-Mart has been facing many issues in order to gain an entry into the Indian market. This is primarily due to the negative sentiment surrounding Wal-Mart. The problem is that Wal-Mart has been projected to be a corporate raider. Wal-Mart is known for driving very hard bargains which leave virtually no profit margin for their suppliers. Yet, suppliers all over the world queue up to deal with Wal-Mart. This is because of the massive scale of operations that Wal-Mart provides them. Even though the per unit margin is very less, suppliers tend to earn more with Wal-Mart because the volume of their business increases substantially.
India is the only country in the world that distinguishes between single brand and multi-brand foreign retail. This is because the small shop owners in India are skeptical that Wal-Mart will crush their businesses. These retailers do not feel threatened by single brand retail stores like Apple. However, they want to keep the multi-brand retailers out of the foray. Since these small retailers also form the bulk of the vote bank, politicians have to give in to their demands. This is the reason why foreign investment in multi-brand retail stores is constrained.
The policy being followed by the Indian government is strange to some extent. Foreign companies are not allowed to set up brick and mortar stores if they sell multiple brands. However, the policy does not impose any restrictions on the e-commerce route. This is the reason why Wal-Mart faced so many restrictions in entering the Indian market, but Amazon was able to do it without any significant hiccups. Recently Wal-Mart has changed its strategy. It will no longer remain a brick and mortar store. The company is aggressively pursuing the online route. The friendly policies and the coveted target market are the reason why Wal-Mart is paying a premium for Flipkart.
However, this has once again led to an increase in the protectionist sentiment. Political parties opposed to the deal have started agitations to show their displeasure. The problem is that Wal-Mart has a horrible brand image. There is an urgent need for Wal-Mart to correct this image. The company has made some attempts in the past. Wal-Mart has categorically stated that retailers are the biggest customers of its cash and carry business. Wal-Mart has also said that retailers are their partners and not their competitors. However, since Wal-Mart has a track record of decimating small businesses and putting them out of business, there is a trust deficit between Wal-Mart and the Indian people.
Wal-Mart needs to understand the psyche of the Indian retailer. It is true that the Indian retailer is opposed to Western companies. However, the Indian retailer is even more opposed to Chinese manufacturers. China-based companies have been flooding Indian markets whereas Indian companies have not been able to sell to China. This has put several small retailers out of business.
Wal-Mart has a fledgling business in China. The supply chain routes have not yet been finalized. This could be the opportunity that Indian retailers have been looking for. Wal-Mart should start sourcing produce from Indian retailers for sale in its Chinese stores. This will lead to a growth in the business of these retailers. Once they gain market share because of Wal-Mart, they will no longer be as skeptical.
The bottom line is that even though Wal-Mart has been given the permission to conduct business on Indian soil, Indian people have not accepted them. Sooner or later, this will become a problem for Wal-Mart. They can use the growing Chinese market to quell fears about their intentions to decimate the small business. In the short run, it may cost them a bit more in terms of production costs. However, in the long run, it will cost them a lot less in lobbying costs.
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