untitled
1
This case study accompanies Chapter 19 of International Corporate Finance.
It is the last and a very big frontier. Brazil is done, China is done. India is
the last Shangri-la of retail. Where will Tesco and Walmart get their growth?
Sunil B. Mittal, chairman and managing director, Bharti Enterprises Ltd.
Albert Montgolfi er is the deputy head of Ca
efour’s strategic planning depart-
ment. He has been charged with a review of Ca
efour’s options with respect to the
Indian market and would submit his preliminary recommendations to Ca
efour’s
oard meeting next April XXXXXXXXXXIndia had been on Ca
efour’s radar for some time
now, and, as late as 2004, Ca
efour had been close to entering the Indian mar-
ket through franchising but decided to defer any strategic move. Bharti Enterprises’
ecent announcement, in late November 2006, of a large-scale joint venture with
Walmart1 changed the competitive landscape in a major way, and Albert knew that
Ca
efour could not defer and temporize forever, as time was of essence. For “big
ox” retailers—the likes of Walmart, Ahol d, Tesco, or Ca
efour—India was the last
uncharted frontier. Indeed, with more than 1.1 billion people, half of them 25 years
old or younger, an economy growing at an annual rate of 8 to 10 percent, and no
major retail chain to speak of, India represented in 2006 a US$250 billion market po-
tential, widely expected to double within 10 years. Retail was estimated to contribute
14 percent of India’s gross domestic product, employed 21 million people, and was
indeed a mainstay of the Indian economy—second only to its agricultural sector.
Yet, India’s retail sector was highly fragmented, with as many as 12 million
outlets—owner-operated general or convenience stores, also known as kirana shops,
which included handcart and pavement vendors. This unorganized sector accounted
for more than 95 percent of Indian retail and generally operated in fl oor space of
500 square feet or less.
The dearth of organized major retail chains when viewed in a context of a boom-
ing economy and an emerging middle class numbering a quarter of a billion people
provided a tantalizing opportunity for both domestic fi rms and multinational retail
giants, except that India was closed to foreign direct investment (FDI) in retailing.
CASE STUDY 19.1
Ca
efour’s Indian Entry Strategy
1 According to Sunil Mittal, “Government policy allows foreign equity in back-end wholesale,
logistics, and real estate, so we’ll do a joint venture partnership in those areas and we will own
the retail business 100 percent until the government allows FDI (foreign direct investment)
there, and then we’ll do a joint venture with our partner.”
2 CASE STUDY
Yet India, long shackled by an overzealous bureaucracy, had since 1991 steadily
elaxed restrictions on FDI in most sectors of its economy, including real estate and
wholesale trading—but not retailing—which raised speculation as to if and when
entry by major foreign retailers would be allowed. An encouraging omen was the
lifting of restrictions for single-
and retailers.
Indian fi rms, for their part, were in the early stages of major investment to take ad-
vantage of legal entry ba
iers that—for the time being—kept at bay formidable mul-
tinational retailers. For example, the Tata Group owned the Westside group and was
developing a retail chain for consumer goods under the name of Croma. Croma was
partly a joint venture with Woolworth, which owned the wholesale operation (allowed
under FDI law) and supplied the retail stores owned by the Tata group. In a similar
vein, Reliance Industries announced in 2006 an ambitious plan to invest US$5.5 bil-
lion over fi ve years to open 1,000 hypermarkets and 1,500 convenience stores.
As in the cases of all other major markets, big box retailers were perceived by
existing mom-and-pop corner stores as a tsunami that would devastate the sector
and throw millions of people out of work. Ca
efour had waged the same battle
over and over again starting with France in the 1960s before turning to similarly at-
omistic retail sectors in Spain, Brazil, Thailand, China, and many others. For public
authorities the policy conundrum was not easy to resolve: On the one hand modern,
large-scale retailers
ought economies of scale effi ciency gains to distribution and
lower prices to end consumers by streamlining the supply chain. For food products,
greater sanitation through a modern cold chain for fresh produce and much-reduced
waste were obvious welfare benefi ts for the consumer. On the other hand, large-scale
etailers would displace millions of mom-and-pop stores, adding to the 40 million
or so of unemployed. Large-scale demonstrations by threatened shopkeepers would
only become more militant as more pressure was being applied on the Congress
party cu
ently in power.
Even if FDI restrictions were lifted, Ca
efour was well aware of the daunting
hurdles that it would face, especially in the food sector, which accounted for ap-
proximately half of its revenue. Absence of modern logistics and a dilapidated infra-
structure would be a major part of the challenge. Lacking proper storage facilities
and refrigerated trucks, the world’s second-largest producer of fresh produce was es-
timated to lose to spoilage and waste as much as a third of its output.2 To make mat-
ters worse, India was weighed down by a byzantine system of government-mandated
intermediaries who deployed an army of agents collecting various transit fees along
the way from the original farmer to the fi nal consumer.3 Needless to say, this cas-
cade of fees levied from the farm to the retail store shelf increased the cost of the
product as much as fi vefold. Would Ca
efour be able to exploit the same competi-
tive advantage that it had honed in other markets starting in France in the 1960s?
One of its recent success stories was Thailand, for which fi nancials are provided in
Case Exhibit 19.1.
2 There were fewer than 5,000 cold storage facilities, providing enough capacity for 10 percent
of what India produced.
3 Nationwide there were approximately 415,000 government-licensed traders and 210,000
licensed commission agents who hawk farmers’ goods on their behalf and take a cut of the
transaction.
Ca
efour’s Indian Entry Strategy 3
CASE EXHIBIT 19.1 Ca
efour’s Financials for Thailand
Balance Sheet (in Millions of Thai Baht)
XXXXXXXXXX
Cu
ent assets Liabilities
Cash and securities 2,960 Trade payables 29,836
Trade receivables 540 Other cu
ent liabilitiesb 10,725
Inventories 12,310 Long-term bo
owings 7,840
Other cu
ent assetsa 15,034 Other long-term liabilities 3,604
Capital assets Owners’ equity 24,342
Fixed assets 33,671
Intangible assets 6,754
Financial assets 5,078
Total assets 76,347 Liabilities and owners’ equity 76,347
Income Statement (in Millions of Thai Baht)
Year 2006
Net sales 154,905
Cost of sales (125,072)
Gross margin from operations 29,833
Selling, general, and administrative expenses (22,184)
Depreciation, amortization, and provisions (4,020)
Financial income, net of expenses 1,609
Income before taxes 5,238
Income taxes (1,637)
Income adjustments (due to consolidation of accounts) (362)
Net income 3,289
a Mostly loans to other companies, including loans to nonconsolidated affi liated companies
and defe
ed and recoverable taxes.
Short-term debts and accruals.
Should Ca
efour defer yet again its entry in the Indian market, or should it de-
vise a modular entry strategy that would allow it to position itself for the day when
estrictions on FDI in retailing would fi nally be lifted?
QUESTIONS FOR DISCUSSION
1. Refe
ing to Ca
efour’s fi nancials for Thailand (see Case Exhibit 19.1), compute
the days sales outstanding ratios for accounts receivable (A/Rs) and its payment
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4 CASE STUDY
defe
al ratio for accounts payable (A/Ps). What is Ca
efour’s cash conversion
cycle? What does it mean for Ca
efour’s working capital requirement and
fi nancing needs? How would you characterize Ca
efour’s competitive strategy
in Thailand?
2. Would Ca
efour be able to replicate its strategy in India? What do you see as
the principal obstacles?
3. Would you advise Ca
efour to enter India now or to await a full liberalization
of FDI for retailers?
4. If Ca
efour decides to enter India now, what mode(s) of entry would you
ecommend?
5. What are the costs and benefi ts to the Indian economy of Ca
efour’s entry into
the retailing industry as a foreign direct investor?
Perisca
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