High-cost realty may trip Wal-Mart in India

Even though Bharti Wal-Mart plans on rolling out its first Indian retail store in 12-18 months, the availability and cost of real estate in India, especially in the metros, is very high and could prove to be a challenge for the low-price retailer.

FP Staff December 20, 2014 12:17:52 IST
High-cost realty may trip Wal-Mart in India

Wal-Mart, which has finally got the green light to start its retail business in a country where even local chains are struggling to make money, will find that it is not easy to make a decent buck in the Indian environment.

Even though Bharti Wal-Mart, the joint venture between Bharti Enterprises and Wal-Mart Stores Inc, plans on rolling out its first Indian retail store in 12-18 months, the availability and cost of real estate in India, especially in the metros, is very high and could prove to be a challenge for the low-price retailer. The central goal of Wal-Mart is to keep retail prices low (everyday low prices) as opposed to using temporary sales and discounts- and the company has been very successful at this. Experts estimate that Wal-Mart saves shoppers at least 15 percent on a typical cart of groceries.

" If we pay too much of rentals, we cannot offer great prices to our customers," Raj Jain, Wal-Mart India's President and Bharti Wal-Mart MD & CEO, was quoted as saying by The Economic Times today.

Highcost realty may trip WalMart in India

AFP

And it is this real estate cost which kept Wal-Mart away from New York city too. Wal-Mart had been looking for a place for a couple of years and finally found an opportunity in eastern NYC, but it could not enter because the real estate cost was too high for it to bring down prices for its customers.

Raj Jain does not want to wait for all states in India to allow FDI in multi-brand retail to roll out its plans and may start opening its outlets from states like Maharashtra. But if Wal-Mart was forced to shelve its NYC plans, what will it do any better in Mumbai where land costs are way higher than in the Big Apple?

Wal-Mart is known for its hypermarkets spread over 100,000 to 200,000 sq ft, usually outside the city, where rents are low. But such a strategy may not work in India. The inflated cost of real estate in big cities will force the big shops to the outskirts of the large metros.

But the Indian consumer is not used to that kind of concept and within the cities rentals are abnormally high for making retail stores a profitable business model.

"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," Rajiv Lal, a professor at Harvard Business School, had been quoted inFirstpost earlier.

But others like Carrefour and Tesco do operate in malls. "In the US every one 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 Business Standard in an interview.

In India the malls are not large enough to offer 1,00,000-2,00,000 sq ft to a Tesco or a Carrefour. Here, retail mall development has oscillated from euphoria to pessimism to a more subdued undertone because of heavy capital expenditure, long gestation periods, constrained financing and revenue-share models. This is why very few developers are executing large format retail stores, observed JP Morgan in a note.

"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," saidPankaj Renjhen, Managing Director - Retail Services, Jones Lang LaSalle India.

But one thing is clear: The success of Wal-Mart is going to be keenly watched and observed by all retail giants who want to expand their footprint in India.

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