Wal-Mart: 'Auf Wiedersehen' Germany, Hello India
Exiting Germany and South Korea a 'brilliant' move that will allow the No. 1 retailer to enter India and expand faster in China, analysts say.
NEW YORK (CNNMoney.com) -- Wal-Mart, a company that doesn't like to admit defeat, did so for the second time in months when it announced Friday that it would exit the German market where it's been hard-pressed to find success.
These setbacks may be humbling to the world's largest retailer, but some retail industry watchers say Wal-Mart is making some very clever moves at the same time.
"It's a brilliant decision by Wal-Mart," said Love Goel, CEO of Growth Ventures Group, an investment firm focused on retailers. "Korea and Germany's retail market is too competitive. Secondly, consumers there really aren't aligned with Wal-Mart's core value proposition of offering bottom-barrel prices."
Freed of having to worry about cracking the difficult German and Korean markets, Wal-Mart will probably now aggressively forge ahead with its plans to enter and expand into more lucrative markets -- primarily India and China, Goel and others think.
This is more a necessity than a "would-like" for Wal-Mart given that the retailer is keen to capture international growth opportunities as it faces market saturation in the United States, where it already operates close to 4,000 stores.
In that regard, "Let's fish where the fish are biting," is becoming Wal-Mart's modus operandi, said Craig Johnson, president of retail consulting group Customer Growth Partners.
"Even for the largest retailer in the world, you're not going to hit a home run everywhere you play," Johnson said. "If it's not working in Germany and South Korea you have to redeploy your resources to a faster-growing situation with more opportunity."
India and China, he said, are the two biggest growth engines of the future for Wal-Mart. "Leaving Germany is smart. It takes just as much management attention to butt your head against the wall in Germany and Korea as it does to crank up the engine in China and India," he said, implying that Wal-Mart can't afford to do both.
A retail nirvana in the east
According to Goel, China and India have among the world's most lucrative retail markets, valued at $700 billion and $300 billion each.
China is ahead of India with 20 percent of its market characterized as "organized" with established retail chains, versus only 3 percent for India. India's remaining 97 percent is comprised of 12 million mom-and-pop shops.
"The $1 trillion Indian and Chinese retail sectors are much larger than Germany, Korea or even all of Europe put together," Goel said. Further, he estimates the retail sector in both countries will grow by at least 30 percent annually for the next decade.
Wal-Mart already operates more than 55 stores in China and is ramping up its growth strategy in the face of stiff competition from European supermarket operators such as French supermarket chain Carrefour and Germany's largest retailer Metro, which are expanding at a fast clip.
The retailer isn't yet in India, but it could be getting close.
India's complex foreign direct investment, or FDI, regulations, currently bar international retailers from directly entering the market. In other words, international retailers who have set up shop in India have opted for franchising deals with local partners or entered into joint-venture partnerships with Indian companies.
The Indian government did somewhat relax its FDI rules earlier this year, allowing "single-brand" retailers such as Nike or Gucci to own 51 percent of their business operations in India. However, this still precludes Wal-Mart, since the retailer sells a variety of brands in its stores.
Wal-Mart spokeswoman Amy Wyatt told CNNMoney that the company recently won approval to set up a "liaison" office in Bangalore through which it plans to quickly study the India market.
She also agreed that Wal-Mart's exit from South Korea and Germany allowed the retailer to "focus on other opportunities like China and India."
Media reports in the Indian press earlier this month said Wal-Mart was in discussions with a leading Indian real estate firm DLF Universal Ltd. for a franchise deal. The reports suggested DLF plans to develop a number of malls around the country over the next five years with Wal-Mart stores located in a select number of locations.
A spokesman for Delhi-based DLF, who did not want to be identified, told CNNMoney that the company was in discussions with Wal-Mart but declined to offer details because the company is in a "quiet period" ahead of its upcoming IPO.
Wyatt declined to comment on the matter.
Given Wal-Mart's supply chain and distribution expertise coupled with its extensive merchandise mix and lack of competition in India, Goel said that if the retail behemoth gets its business off the ground there, it could "easily sustain triple-digit or high double-digit growth annually over the next 5 to 10 years."
Moreover, he also has an idea about how Wal-Mart could potentially bypass India's FDI roadblock.
"There is nothing stopping multi-brand, multi-channel retailers like Wal-Mart, Target, J.C. Penney, Best Buy or Home Depot from entering India tomorrow," he said.
"The most optimal, capital-efficient way to enter the India retail market is through a multi-channel, direct-to-consumer model involving the Internet, TV, catalogs and mobile phones supported by warehouses to stock inventory and fulfill orders," he said. "This eschews the high real-estate costs for retail stores. India is also one of the largest Internet user populations in the world and twice as many cellphones as landlines."
"Best of all, this model circumvents current FDI regulations," he said.