Wal-Mart Bazaars? India Opens its Doors
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India’s government has put its stamp of approval on sweeping economic reforms, including plans to allow foreign retailers into the country. This is a big opportunity for retail giant Wal-Mart (NYSE: WMT), as India’s $505 billion market of 1 billion people has now been opened for business.
India’s government in New Delhi has touted the benefits of overseas companies, which invest in the country’s infrastructure such as processing, manufacturing, storage, warehouses and packaging. The Indian government’s decision is being heralded as a chance for India to dramatically improve everything from the country’s food chain to the quality of its roads. India certainly needs the revenue to come in to its coffers, as inflation is soaring and the Indian economy has experienced hitches over the past few months.
“India is a big opportunity, of that there is no doubt,” says Arun Kejriwal, director of advisory firm Kejriwal Research & Investment Services. “We have the world’s second-largest population; we have a fairly large middle class, so we become an attractive destination for any sort of organized retailing.”
Although this new eastern horizon has been opened up to the Bentonville, Arkansas-based Wal-Mart, India has laid down some very scrupulous regulations in order to protect small businesses. Companies must commit to investing a minimum of $100 million in the community, with half that required to be invested in rural areas. Retail stores can only be opened in states which have agreed to India’s new policy. Also, large stores can only be set up in urban areas with populations of more than a million, unless the individual state approves the policy.
Clearly Asian markets are not all fun and games, and need to be approached with caution. Just recently, Home Depot (NYSE: HD) has announced that it is shutting down all of its major stores in the giant Chinese market. Home Depot joins a growing list of retailers that have not succeeded in China. Unfortunately, these companies failed to comprehend the local culture, and introduced strange business models that are more successful in the U.S. or other countries.
Best Buy (NYSE: BBY) closed its nine outlets in China in February 2011 after discovering that Chinese consumers needed air conditioners and washing machines more than surround sound stereo systems and coffee makers. Mattel (NASDAQ: MAT) closed its China-based Barbie store in March of 2011 after it learned that Chinese parents would rather have their children read books than play with plastic dolls.
Wal-Mart has a much better chance at success in India, and Asia at large, as its business model is more adaptable and compatible with Asian culture. Wal-Mart already has 330 stores in China, and is doing quite well there. India is a key market for Wal-Mart's international operations.
Another reason why Wal-Mart is poised for growth in Asia is because it is not a company which fits into one single product mold. The company is not just based off of one single good, but rather sells a multitude of useful goods which people would like to buy. Although Best Buy sells a wide variety of electronics, it does not sell essentials such as toothpaste, food, and common household goods. Home Depot, while it retails home improvement items, has the same issue that Best Buy has and failed to understand the Asian culture of “do-it-yourself.” Mattel mostly sells toys and games, which, as previously noted, are a cultural roadblock.
Best Buy, Mattel, and Home Depot are examples of how not to engage Asian markets. Wal-Mart is hoping that the new Indian reforms will jump-start a new, lucrative segment of its business. By looking at the failures of Best Buy and others, Wal-Mart and competing retailers can look forward to opening up new eastern horizons in India.
EvanBuck has no positions in the stocks mentioned above. The Motley Fool owns shares of Best Buy and Mattel. Motley Fool newsletter services recommend Mattel and The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.