Wal-Mart, the world’s largest retailer, finds itself in a curious situation in India. Barred by government restrictions, it cannot directly operate as a retailer. As a result, the company’s strategy has been to develop what Raj Jain, Wal-Mart India’s president, calls a business-to-business wholesale cash-and-carry operation. In addition, Wal-Mart India is playing a leading role in helping develop modern supply chains in India. In an interview with India Knowledge at Wharton in Washington, D.C., at the 33rd annual meeting of the U.S. India Business Council, Jain spoke about Wal-Mart’s operations and strategy in India.
An edited transcript of the conversation appears below.
Knowledge at Wharton: Before you joined Wal-Mart, could you tell us about your career at Whirlpool and Unilever?
Jain: Yes, for sure. I am an engineer. Soon after getting my engineering degree, I joined Unilever, where I worked, both in Europe as well as in India, for 16 years in various assignments in manufacturing, logistics, supply chain, and marketing. Then, I moved to Whirlpool in the supply chain area. Finally, I was the managing director of Whirlpool India, and then moved on to a regional role in Shanghai, in China. For the last two years, I’ve been working in Wal-Mart. I was based in Shanghai and recently moved to India, with a view to run our joint venture in India.
Knowledge at Wharton: How did your move to Wal-Mart come about?
Jain: Having worked for 10 years in Whirlpool, I was getting a bit tired of selling appliances in that industry. I was looking for a change. I learned that Wal-Mart was looking for a president of emerging markets to evaluate entry of Wal-Mart in new countries outside of where Wal-Mart was already present. It seemed like an interesting challenge. I interviewed, and it led to this new job.
Knowledge at Wharton: Wal-Mart is the world’s largest retailer and the number-one company on the Fortune 500 list. But Wal-Mart in India is not really in the retail business. Could you please explain this curious fact to people who may not know the whole story?
Jain: Sure. I think it emanates out of the fact that in India, currently, retailing is a protected sector. The government does not allow any multinationals to operate in retailing so no foreign investment is allowed in retailing — other than in wholesaling, and 51% in single brand retail, which, of course, is not our business model. That’s why we do not have any retailing in India.
What we propose to have in India is a wholesale cash-and-carry business, which is only permitted for business members. We are also a franchise store to a retailing company, which is Bharti Retail, who are our joint venture partners, who will run and own stores, but we provide them with merchandise and management expertise to do so.
Knowledge at Wharton: How exactly would that business-to-business model work?
Jain: The way it works is — essentially, India is a nation of retailers. If you look at it, India has 12 million kirana (grocery) stores, which, in a per capita, given even the population of India, is, I believe, the highest in the world. We have a lot of small, mom-and-pop stores in India, catering to all kinds of consumers.
These kirana stores traditionally buy from wholesale markets, and some of them are also serviced directly by manufacturers. In fact, India has one of the most evolved distribution systems by big companies. Companies like Unilever, for instance, and ITC have probably one of the most evolved distribution systems in India. They service just close to a million of those 12 million kirana stores, directly, which basically means that 90% of these stores actually have to go to wholesale markets to buy products.
There is a very evolved wholesale network in India for products, from which these kirana stores get serviced. It is a low-cost operation, but it is also very inefficient. Especially when you move to produce areas, fresh merchandise, fruits and vegetables, meats, and so on and so forth, it is very unevolved and it is very archaic in many ways.
How this model works is, essentially, that you have a selling point, where you directly source products from manufacturers, and then sell those products to kirana stores at great prices, all under one roof.
Knowledge at Wharton: Wal-Mart’s success around the world has been driven by your effective use of information technology and supply chain management techniques. That is basically what allows Wal-Mart to pass along low costs to its customers. In the context that you just described, how would you apply those principles?
Jain: Wal-Mart’s mission, worldwide, which is extremely relevant to all emerging markets, let alone the United States — is saving people money so that they can live better. As a result, the whole Wal-Mart business revolves around running a very efficient supply chain, saving in every aspect of that supply chain. It’s not just about negotiating better prices with the suppliers; it is actually about working with suppliers to remove any inefficiency in the supply chain.
That is exactly what we will do and are doing in India. We are working with suppliers on packaging. We are working with suppliers on stock control. We are working with suppliers on better management and inventory, and so on. All those savings which come out of that effective management of supply chain will be passed on to the kirana stores, who will be our customers in this case.
Knowledge at Wharton: You have also worked with Wal-Mart in China. What are the main differences between working in India and China?
Jain: India is very unique. In fact, I have lived in China, so maybe I can say it with a little bit more liberty that the only thing common between India and China is the one billion people. If you really operate in the two countries, I think, there are very different consumers, very different kinds of legislation, very different levels of economic development, social infrastructure, and governmental management of the economy.
The differences in China and India are very, very unique. India is a unique market, because India has had an evolved wholesale network for several centuries.
Knowledge at Wharton: What are some of the main challenges you face in implementing supply chain strategies in India?
Jain: The biggest challenge is that there is no organized supply chain in India. We’ve even been surprised by some of the leading manufacturers in India like Unilever, Procter & Gamble, and some other big names, who are actually welcoming the arrival of organized supply chains in India and Wal-Mart pioneering that effort.
Because of the lack of that supply chain today, there is no forecasting, there is no understanding of how demand is. It’s largely a push based system. So, I think, getting that transparency across the supply chain will be very unique.
The other thing is, there is no refrigerated cold chain for fresh produce in India, so therefore a lot gets wasted. By McKinsey’s own work, which the consulting firm has done, almost 40% of fresh produce in India gets wasted from farmland to the time it reaches the consumer.
And thirdly, because there is no transparency of consumption, the farmer and the small manufacturer actually ends up selling to the middle men who actually may or may not be so transparent about pricing.
Knowledge at Wharton: Some of these challenges seem to be big issues that the government should be tackling, rather than an individual company. How are you navigating your way around those challenges?
Jain: We are, as far as possible, working with the government in trying to tackle some of these issues. The good news is that the government realizes that it is restricted in its ability to invest and do a lot in this area. So, there are a lot of public/private partnership possibilities in this area.
We are working with the government in areas like training and development. The government is very keen in promoting training for people who can work in the supply chain area. We are also working with the government in the area of setting up large warehousing and distribution facilities and making land available at a reasonable cost to us to be able to do that.
The government also recognizes this as an issue, and, from a taxation standpoint, the recent budget actually reduced the taxation on cold chain equipment, which will go a long way in making some of those investments possible.
Knowledge at Wharton: What is Wal-Mart’s sourcing strategy for India and how is it different from that strategy in China?
Jain: Wal-Mart’s relationship with India is much older than our recent joint venture and our recent steps in the area of wholesale supply chain. We’ve been more than 10 years in India, sourcing products in India, largely textiles, apparels, home products, and most recently, gems, jewelry and so on.
We do approximately $400 million of sourcing out of India, and that could grow several-fold as we go forward. But, once again, the efforts become magnified several times if there is a deeper understanding of the supply base. With this new effort in this joint venture about wholesale cash-and-carry, we will make deep inroads into small and medium industries and help develop those industries to a level where they can improve their quality and compliance, where these products can then be taken into other parts of the world. I see a bright future for sourcing out of India with Wal-Mart over the next decade.
Knowledge at Wharton: One of the big problems in sourcing from China was the recent controversy over lead contamination that affected products like toys. Do you see any hidden landmines in sourcing from India that consumers should be concerned about?
Jain: The issue of India is once again developing responsible sourcing points in India, and manufacturers in India. As I said earlier, developing that responsible base, which is compliant to global standards in terms of the kind of labor which is used, the manufacturing practices, and finally the quality of the product, is critical.
At Wal-Mart, we spend an awful lot of time and energy in doing that. It is a slow process; it doesn’t happen overnight. All we need to do is be patient and work through those processes to ensure that Indian small and medium manufactures come to that level. There are very high quality manufacturers in India who are supplying to us already. We are pleased with our sourcing operations out of India.
Knowledge at Wharton: Where will Wal-Mart India be four to five years from now?
Jain: We are just setting up the initial foundation of our business in India from a wholesale cash-and-carry standpoint. I think, it’s learning about the market, learning about the end consumer, learning about the trade. Developing a team of good leadership and a team of large associates can make this business work.
If all goes as per plan, I think, in five years we should have several cash-and-carry operations in India. It may not be across India, but certainly in the important geographies in India. We should have a very good understanding of the end consumer, of the trade. And we should have a scale from which we can grow very rapidly.
Our submission to the Indian government is that we hope in this time-frame the Indian government would liberalize the FDI regulations in retail, and permit Wal-Mart and companies like Wal-Mart to be able to participate in the retail growth going forward.
Knowledge at Wharton: In thinking back on your career, what is the single biggest leadership challenge that you have faced? How did you overcome it, and what did you learn from it?
Jain: The single biggest leadership challenge in my experience has been to craft a vision, which is way beyond quarterly goals, which is way beyond financial goals. Sometimes leaders get too mired into achieving financial targets and so on.
I think a compelling vision that is not unique to the business, but is good for the larger society and the customer whom you are serving is important. I think, equally important is staying true to it, because for leaders, it is very easy to get derailed into meeting financial, quarterly goals and so on and so forth. If your vision is compelling and you can stay true to it, developing a sustainable business becomes that much easier in whatever you do.
Knowledge at Wharton: Thank you so much for joining us today.
Jain: Thank you very much for the opportunity.