Wal-Mart's Indian Connection

At first blush, it seems like the strangest of pairings—the world's biggest retailer teaming up with the world's fastest-growing phone company. News on Nov. 27 that Wal-Mart Stores (WMT) had tapped Bharti Enterprises as its partner on a new venture to take on India's huge but fragmented retail market left many scratching their heads. What does a cellular carrier know about selling saris or sodas?

Possibly a lot. Bharti's Airtel is ubiquitous in India, much as Wal-Mart's stores are in the U.S.: Its black, red, and white logo is plastered on the sides of buildings in countless cities and villages. The Delhi company has grown to be the largest Indian mobile player, with 29 million subscribers and $2.5 billion in annual revenues, by perfecting its own "everyday low prices" formula.

By outsourcing off the technical aspects of the operation to established players such as Nokia (NOK), Ericsson (ERIC), and IBM (IBM), Airtel succeeded in driving down its price-per-minute charge to less than 2 cents. The company is an aggressive marketer, roping in customers at a rate of 1.5 million a month through hundreds of thousands of shops that sell Airtel services and recharge phones. "To play in India, you play to the 1 billion population, and you cater to all," says founder and Chairman Sunil Bharti Mittal.

End Run Around Regulation
Now the 49-year-old Punjabi entrepreneur is making a bet that could elevate his company to the ranks of India's most important conglomerates, such as Tata and Reliance. "We're at a tipping point," says Mittal. "India is becoming a consuming nation."

With India's economy growing at 8%-plus annually, retail sales are set to soar from $300 billion today to some $637 billion by 2015, estimates local consultancy KSA Technopak. But the market is now dominated by millions of tiny mom-and-pop shops. An antiquated transportation system and an army of middlemen have hobbled the development of homegrown retail chains with nationwide reach. And foreigners have been shut out by laws barring them from operating anything other than single-brand outlets.

Bharti and Wal-Mart have found a way around that prohibition. The partners will set up a 50-50 joint venture to handle logistics, warehousing, and haggling with suppliers. A separate company, owned entirely by Bharti, will run the retail end of the business. Bharti expects to have its first stores up and running within 12 months.

The behemoth from Bentonville, Ark., isn't the first multinational to court Bharti. French insurance giant Axa Group (AXA) recently formed a joint venture with the Indian company to sell life insurance. Retailers Carrefour of France and Tesco (TESOF) were each conducting their own mating dance with Bharti when Wal-Mart cut in. The American company wouldn't comment on the tieup except to say that it chose Bharti because of its knowledge of the Indian consumer.

Stiff Competition Ahead
India hands say an even bigger asset is Mittal's entrepreneurial drive. The son of politician, Mittal started his first business, a bicycle-parts maker, shortly after graduating from university in the 1970s. In the 1980s, he switched to importing portable electricity generators from Japan. Bharti was manufacturing push-button phones in the early 1990s, when India began deregulating its telecommunications sector. Mittal won bidding for a cellular license in 1992, and over the next decade, proceeded to buy out many of his struggling competitors.

Despite that impressive track record, Mittal and his new partner, Wal-Mart, had better brace for some stiff competition. Investment in India's retail sector is projected to total $25 billion over the next five years, up from a mere $2 billion in the past decade—with slightly over a third coming from foreign players.

Dreaming Big
Among Indian conglomerates, the race is already on. First out of the gate was Reliance Industries, which has already opened 30 produce stores and plans thousands of outlets in the next few years. "The size of the opportunity is huge, and there's room for a lot of players," says Venugopal Komanduri, chief executive for customer operations at Reliance Retail in Andhra Pradesh, the state where it's piloting store concepts.

Not everything Mittal touches turns to gold. In late 2004, Bharti teamed up with British investment bank Rothschild to take advantage of India's low-cost farming to export fresh fruit and vegetables to Europe. So far, the business has been a major disappointment. Crop yields are poor, and the company hasn't developed the cargo-carrying capacity to export to Europe.

Nonetheless, few would bet against Mittal. "Now is the time for people who dream big and have the ability to make it happen," says Ajit Rangnekar, deputy dean at the Indian School of Business in Hyderabad. "Sunil Mittal is one of those people."

Source : Business Week