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Resource centre on India's rural distress
 
 

In India, Wal-Mart Goes to the Farm by Vikas Bajaj


At first glance, the vegetable patches in this north Indian village look no different from the many small, spare farms that dot the country.

But up close, visitors can see some curious experiments: insect traps made with reusable plastic bags; bamboo poles helping bitter gourd grow bigger and straighter; and seedlings germinating from plastic trays under a fine net.

These are low-tech innovations, to be sure. But they are crucial to the goals of the benefactor — Wal-Mart — that supplied them.

Two years after Wal-Mart came to India, it is trying to do to agriculture here what it has done to industries around the world: change business models by using its hyper-efficient practices to improve productivity and speed the flow of goods.

Not everyone is happy about the company’s presence here. Many Indian activists and policy makers abhor big-box retailing, fearing that it will drive India’s millions of shopkeepers out of business. Some legislators are suspicious of the company’s motives. The government still does not allow Wal-Mart Stores and other foreign companies to sell directly to consumers.

But Wal-Mart is persisting because its effort in India is critical to its global growth strategy. Confronted with saturated markets in the United States and other developed countries, the company needs to establish a bigger presence in emerging markets, like India, where modern stores make up just 5 percent of the country’s retail industry.

Establishing good relations with farmers is a centerpiece of the company’s plans. Though Wal-Mart is pushing many of its traditional products in India, like clothes, electronics and home goods, perhaps none is as essential as food. Wal-Mart needs high-quality produce at low prices to draw customers in volume.

The challenges are significant. Buying and transporting produce are difficult tasks because India has millions of small-scale farmers and an agriculture system riddled with middlemen.

Here in Haider Nagar, in the bread basket state of Punjab, farmers who supply vegetables to Wal-Mart say they like working with the company. It typically pays them 5 to 7 percent more than they earn from local wholesale markets, they said. And they do not have to pay to transport produce because Wal-Mart picks it up from their fields.

Abdul Majid, who sells cucumbers to Wal-Mart, says his yields have risen about 25 percent since he started following farming advice about when to apply fertilizers and which kinds — more zinc, less potash — from the company and its partner, Bayer CropScience.

Mohammad Haneef, a farmer in a nearby village, said he had sold to two other companies before Wal-Mart, but one shut down and the other cheated him and paid him late. Wal-Mart is much better, he said, but its buyers are picky, taking the best vegetables and leaving him with inferior ones that he still must truck to wholesale markets.

“You have to establish trust,” he said in Hindi. “Wal-Mart has been paying on time. We would just like them to buy more.”

For Wal-Mart, establishing an agricultural beachhead in India will not be easy. Many Indian companies have abandoned or significantly scaled back efforts to run supermarkets. Some companies grew too quickly and flamed out. But many others were undone by the numerous Gordian knots that hold back Indian agriculture: laws limit who can buy farmers’ crops, 35 percent of fruits and vegetables are wasted because of inefficient transportation and farmers earn too little to invest in their marginal farms.

“Anybody who says they can revolutionize retail in this country in a short period of time” is overestimating their abilities, said R. Gopalakrishnan, executive director of the Tata Group and chairman of Rallis India, a company that makes fertilizers, seeds and pesticides.

Wal-Mart is also limited by New Delhi’s ban on foreign-owned retail chains that prevent it from selling directly to Indian consumers.

“Not having access to our own retail stores through our own investments is a serious impediment,” said Raj Jain, who heads Wal-Mart’s Indian operation. “How do you pay for that big back end if you are not going to have access to the front end?”

Right now Wal-Mart operates in India through a 50-50 joint venture with Bharti Enterprises, an Indian conglomerate that also owns the country’s largest cellphone company. Their partnership, known as Bharti Wal-Mart, supplies retail stores that are fully owned by Bharti and runs a wholesale store that sells to shopkeepers, hotels and other businesses.

Wal-Mart executives would not say how much money the company has invested in India, but its operation is at the forefront of a second big push into emerging markets. In the 1990s, Wal-Mart set up shop in China, Mexico and Brazil and now has hundreds of stores there. By comparison, Bharti Wal-Mart has just one wholesale store and will soon open two more. It employs 800 people in India, and hopes to have 5,000 in three years.

In recent speeches, senior Indian leaders have suggested that they would like to remove restrictions on the retail industry to help reduce food prices, which were up 20 percent in January compared with a year earlier. Last month, Prime Minister Manmohan Singh cited the need “to take a firm view on opening up the retail trade.”

But even as senior leaders speak of more openness, regulators recently published a rule that would restrict wholesale companies like Bharti Wal-Mart from earning more than 25 percent of their revenue from sales to affiliated “group companies” — a term that is not clearly defined in the rules. A spokeswoman from Bharti Wal-Mart, Arti Singh, said the company was trying to find out what this meant.

Last year, a committee in the Indian parliament said the government should not allow any more wholesale stores because companies like Wal-Mart were using them as “camouflage for doing retail through back door.” The legislators also asserted that foreign companies would raise their initial low prices after they had driven small retailers out of business.

Wal-Mart has not waited for policy makers to effect changes. It has spent the last two years building relationships with farmers and suppliers, and setting up its supply system. It is building a big distribution center outside New Delhi to supply Bharti stores, which are branded Easy Day, in and around the capital.

Wal-Mart also has learned to adapt its operations to numerous challenges. For instance, because trucks move slowly on the country’s congested roads, Wal-Mart’s fruit and vegetable distribution center near Haider Nagar supplies retail stores only within 200 kilometers (124 miles) to keep produce fresh. By comparison, similar Wal-Mart facilities in China supply stores as far away as 400 kilometers.

But that means the company will have to set up more distribution centers with expensive power generators, making it more difficult to make money in India.

Still, Mr. Jain, who previously worked for Whirlpool and Unilever, was optimistic. He said the company would add more farmers and stores in Punjab and neighboring Haryana State, then begin expanding further.

This is “a controlled experiment,” he said. “It will take some time to make it sustainable and economically viable. Then once that happens, we need to take it to some other geographies and prove the model.”