Wal-Mart, the world’s largest retailer, entered the India market in 2007 with a joint venture with Bharti Enterprises in a wholesale cash-and-carry format, open only to commercial and institutional customers such as retail shop owners and restaurants. India is the only country across the globe where Wal-Mart has only B2B operations.

Wal-Mart has taken this route because of government regulations. While India allows 100% foreign direct investment in wholesale and 51% in single-brand retail, FDI in multi-brand retail is not yet allowed. It is, however, expected to be opened up soon and Raj Jain, president of Wal-Mart India and managing director and CEO of Bharti Wal-Mart, sees huge opportunities for growth. In an interview with India Knowledge at Wharton, Jain was emphatic that “you can’t monetize all your investments just on cash-and-carry.”

An edited version of the transcript appears below.

India Knowledge at Wharton: It’s been a few years since Wal-Mart entered the India market. What are the details of Wal-Mart’s operations in India at present?

Raj Jain: Just to recount our history, we signed the joint agreement with Bharti in August 2007. In 2008, Bharti opened its first retail store by the name of Easy Day in Ludhiana in Punjab. [At the end of] 2009, Bharti Wal-Mart, the joint venture company, opened its first cash-and-carry outlet in Amritsar in Punjab under the name Best Price. That’s really where our stores’ story begins. Our distribution center near Chandigarh started in early 2008.

Currently, we have eight cash-and-carry stores. Sometime next month we will be opening our first store in [South India] in Vijayawada (Andhra Pradesh). By the end of this year we should have around 12 to 13 cash-and-carry stores and over the next 12 months we hope to open another 10 to 12 stores.

Each of our cash-and-carry [stores] has approximately 25,000 to 30,000 members. These are divided into three segments: resellers, who account for the bulk of our business; offices & institutions, [which] account for 20% of our business and hotels, restaurants and caterers, [which] account for the rest.

Each store has approximately 6,000 to 6,500 SKUs [stock-keeping units, unique identifiers for each product] of which I would say about 20% to 30% vary with the location because India is such a geographically diverse place — food habits are different, apparel habits are different, color preferences are different and so on.

We have close to around 2,000 suppliers overall; some of them are regional and some are national. And more than 95% of our products are sourced from India. We are also the sole suppliers to Bharti Retail.

India Knowledge at Wharton: How do your operations in India compare with your operations globally in terms of format?

Jain: India is a very unique market for two reasons: One is that India is unique; it is unlike any other market. India is also unique because we do not have the FDI restrictions in any other country that we operate in. The cash-and-carry format that we run here is an entirely B2B [business-to-business] operation. [India] is almost the only place in the world where Wal-Mart does a thing like this. We do have a cash-and-carry format in Brazil called Maxi, but it is not restricted to business-to-business, it is open to everybody. Our initial experience [in India] has been good. There is a possibility that we could translate some of this learning and experiences to other countries in the world.

India Knowledge at Wharton: Can you share some numbers regarding your investments in India up to now and future investment plans here? Also, how does this compare with your investments in China?

Jain: I won’t be able to give the overall number, we don’t share that publicly. But each cash-and-carry is an investment of about US$7 to $8 million on the store itself. Then there is a huge investment we have to make on the back end for the distribution centers and the supply chain, plus obviously there is all the funding in the people, the home office etc. So I think there are substantial investments. Having said that, in retail it is not so much about the capital you invest, unless you buy land and so on. It’s all about the network that you create between suppliers and consumers.

India Knowledge at Wharton: What about your investments in China?

Jain: In China, we don’t have a cash-and-carry business. We have largely a retail business and predominantly one format, which is a super center format [with stores of] 200,000 square feet, U.S. style large stores. In India, we don’t have those. Our biggest stores [in India] are 50,000 to 60,000 square feet. Even Bharti Retail stores are not very big. So the comparison is quite stark and different.

China has been open to retailing for foreigners for over 15 years and we have a presence of over 200 stores in China. Having said that, I think if FDI in India were to open, then Wal-Mart would be happy to invest and accelerate our business in India on the retail side as well. And my own sense is that we will be able to create a business that is as large as China in a relatively short period of time.

India Knowledge at Wharton: Can you share a bit more about the opportunities that you see in India for Wal-Mart? How dependent is this on FDI in multi-brand retail opening up?

Jain: India is a US$400 billion retail market, so it’s obviously a very large market and growing very rapidly, maybe at around 15% per annum. Various figures are quoted of organized retail and, depending on which report you read, organized retail [accounts for] anywhere around 8% to 9% or 10% to 12% [of that figure]. But within that, in certain categories like apparel or footwear, organized retail is a substantial portion. But if you look at food and grocery, which is largely our focus area, [organized retail] is less than 1%. So the potential is huge.

My own sense is that if FDI were to open, even with the best will in the world and the best resources that large companies can bring in, I don’t think this can go to more than 10% over the next 10 years. There are some apprehensions politically [about opening up FDI in multi-brand retail] but in my view 10% is probably the maximum that can be achieved in the next 10 years because of the size of our country, the enormity of the challenge and so on.

Having said that, I think the big advantage of all this will be in the back end. The supply chains in India today are literally the same as they were 200 years ago. They haven’t changed much. I think that will have to undergo significant change as India progresses. And FDI in retail will facilitate this. I don’t think India’s 8% to 9% GDP growth is even sustainable unless our supply chain is fundamentally changed. That is reflected in the high food inflation this country has been facing for the past two years….

China is a completely different model altogether. They don’t have these kinds of supply chain constraints. They have modernized their agriculture, cooperative farming [and] farm-to-market policies much in advance of India and the government [in China] plays a very important role in doing those things. In India, the government doesn’t play a role. It doesn’t have the financial wherewithal or the capacity and it’s pretty much left to the private sector. And given our legal framework of the APMC [the Agriculture Produce Market Committees Act, which set up marketing boards to facilitate the sale of produce] and so on and so forth nothing has happened. So I think that is where the real opportunity is.

India Knowledge at Wharton: So you would say that huge opportunities are there provided FDI is allowed in multi-brand retail?

Jain: Yes. We have made, let’s say, “X” investment in supply chains right now. We know that [10 times that] is required, but companies like ours will be shy of making that investment unless we know that we can monetize those investments over a period of time through retail. Because if we make those investments in the back end and we are not allowed to sell in the front end then we cannot recover our investments.

India Knowledge at Wharton: What will your growth strategy be once FDI in multi-brand retail opens up? Also, what will happen to the partnership with Bharti?

Jain: We are very happy with the partnership with Bharti and we intend to continue with it as we go forward. Having said that, I think a lot will depend on how FDI opens up. From what we’ve heard in the press, the government is not going to open FDI fully. It will probably open to 51% and there will be a lot of qualitative restrictions. To that extent, we will have to tailor our entry strategy based on that. So unless we know the details we can’t say much. But clearly, once FDI opens, we would be interested in opening retail stores, participating with Bharti in opening more stores and accelerating that program.

India Knowledge at Wharton: But Bharti already has its own retail stores and its own retail strategy, so how will the partnership pan out?

Jain: It’s difficult for me to comment, largely because we don’t know how [FDI] is going to open. And therefore we haven’t really talked to Bharti on what’s the best way forward. All I can say is that is that we enjoy an outstanding relationship and we will do what is best for the country.

India Knowledge at Wharton: Just to step back a little, since the government did allow 100% FDI in the cash-and-carry format when you first entered India, why did you chose to go in for a joint venture with Bharti?

Jain: The rationale was twofold. We felt that in a country like India it would be good to partner with a local [company] because we wanted to grow aggressively. After four years of experience in this partnership, we feel that it has been very good. Bharti is a large company; they understand India [and] they understand how Indians shop and how they consume. [Bharti] understands the political landscape and the operating landscape.

The second reason was that we also had a supply agreement with Bharti Retail as a result [of the joint venture]. That has allowed us to, if not run retail stores, at least understand the supply chain of retail and the consumer. I think that gives us a head start over several other international retail chains.

India Knowledge at Wharton: But what if FDI in multi-brand retail does not open up anytime soon, for whatever reason. Will you continue with your current cash-and-carry format?

Jain: Yes, we certainly intend to continue with our cash-and-carry format. We are totally committed to that. Having said that, if FDI does not open in the next three years or so, then that may require a rethink on the whole strategy, because as I said, you can’t monetize all your investments just on cash-and-carry.

India Knowledge at Wharton: What growth strategy are you adopting in your cash-and-carry business in India? Also, how different are your stores from other players like Tesco, Metro and Carrefour?

Jain: I think there are several differences. First of all we have a format that is completely dedicated to B2B.

India Knowledge at Wharton: But isn’t that true for the others too?

Jain: Yes and no. I think the others have many more SKUs than we have, probably twice the number, and the reason in my view, is that we are very much focused on the wholesale business only. That gives us some advantages and some disadvantages because we don’t cater to some kinds of customers.

The other difference is that we started with a 50,000 square feet [space] whereas some of our competition started with much larger [stores]. The third thing is thatwe started our journey with the smaller towns and semi-rural markets, while our competitors started with metro towns, so it’s a completely different route. We believe that the customers, especially the retailers in the non-metro towns, are completely underserved. So we were trying to help solve that supply chain problem. Most of our expansion in the next 12 to 18 months is going to be in such locations.

India Knowledge at Wharton: What advantage do these differences give you over your competitors?

Jain: This is our strategy. It’s too early to say whether it gives us any advantage or not.

India Knowledge at Wharton: Will you be using the same geographical route in your retail operations if and when FDI in multi-brand retail opens up?

Jain: Possibly, because we are setting up our supply chains there and we would like to leverage those.

India Knowledge at Wharton: You mentioned India’s diversity earlier;India is really 20 to 30 different markets. Going ahead, how will you address this challenge in your retail format?

Jain: Our regional assortment will be different from town to town and region to region. That is very critical for us. Even now, we help Bharti Retail in doing very extensive customer research before they open stores in any new market. For instance, in Bangalore if you go to an Easy Day store we have done a lot of work around what people in Bangalore like versus some other catchment. Obviously, Bangalore is different from Delhi, but even within Bangalore, the ethnicity of the catchment in which you open a store may be different from another [area]. So we do a lot of market research.

India Knowledge at Wharton: Wal-Mart has been sourcing from India for around 10 years. How significant is India in terms of a sourcing base for Wal-Mart?

Jain: We have been sourcing from India for several years now. India is traditionally good at gems, jewelry, cotton, textiles, home products, etc. Our belief is that India has a much bigger potential than we are currently tapping. Once FDI opens and we get to know our supply base in India well, we can probably quadruple our sourcing from India because once we open more stores, we will get to know a lot more suppliers, we will develop them to international standards and then we can introduce those suppliers to our global sourcing [team].