WAL-MART MANAGING

– A CASELET
Wal-Mart is the world’s biggest multinational. Yet,
its business model, which has conquered the US, is
totally unsuited to Indian conditions.
   Historically, MNCs have had high profit margins
arising from quasi-monopolies in technology and
finance, and political influence translating into
protectionism. In the US, trade unions fought for a
bigger share of the surpluses, and obtained the
highest wages in the world. In effect, MNCs and the
trade unions shared monopoly profits garnered at
consumer expense.
   
Wal-Mart has defied this model. Far from seeking
high margins, it has relentlessly cut prices and kept
profit margins so low that competitors give up. Its
profit margin is just 3% of sales. Prices at Wal-Mart
can be half or less than at major department stores.
Wal-Mart quality is often poor, though that is
improving.
   So, unlike historical Numero Unos, Wal-Mart has
risen by cutting instead of raising prices, by reducing
instead of increasing profit margins, by catering to
the masses rather than the well-heeled, and by using
the cheapest rather than the most expensive workers.
 Pankaj Ghemawat of Harvard University estimates
that Wal-Mart’s lower prices benefit US consumers
directly by $18 billion a year. Besides, Wal-Mart
obliges rivals to cut prices. The net benefit,
according to consulting firm Global Insight, is a
whopping $263 billion. This dwarfs anti-poverty
programmes. The greatest beneficiaries of Wal-Mart
are the poor.
   Wal-Mart aims at scale economies of every sort.
By buying massively, it pays least to suppliers. It has
massive stores with acres of parking space to
accommodate hordes who drive in. This strategy
needs cheap land, so Wal-Mart stores are typically in
urban peripheries, small towns and rural areas. Petrol
is cheap in the US, so Americans happily drive an
hour or more to a Wal-Mart store 30-40 miles away.
    Conditions are totally different abroad, so Wal-Mart
has often failed in other countries. Ghemawat says that
the further Wal-Mart goes from the US the worse is its
performance. It shut down in Germany after losing
hundreds of millions of dollars, and sold out in Korea
too. It now accepts the need to adapt to local
conditions, but adaptation erodes the power of its US
model.
   Land prices have skyrocketed in India, so a US-style
superstore would have to be situated miles outside a big
city. It will not happen that, an Indians driving for
hours to a big store on the outskirts of Delhi
or Mumbai. Unlike in the US, the poor and lower
middle-class in India do not have cars or cheap petrol
to facilitate long-distance shopping.
  So, small shopkeepers will easily compete. They typically
evade sales tax. Many pay low rents because of rent control.
They are located close to consumers, and provide home
delivery at no extra cost. Some even provide credit. Even if
Wal-Mart is cheaper, many consumers will opt for the
convenience of local shopkeepers.
   To succeed in India, the Wal-Mart model needs major
surgery. It can procure imported goods cheaper than anyone
else. But its Indian partner, Bharti, knows the local market
much better. On balance, Wal-Mart needs Bharti more than the
other way round.