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Yet Again, Walmart Prepares to Expand into India

Despite serious missteps attempting to penetrate the Indian market in the past, Walmart is digging in its heels and giving expansion there another try. The colossal retailer announced plans to open between forty and fifty new wholesale stores In India over the next four years in an effort to capitalize on the country’s vast reserves of consumers.

According to Scott Price, chief executive of Walmart’s Asia division, the expansion into India will involve a substantial wholesale component, delivering goods to mom-and-pop shops, often over difficult terrain, as far as twenty-five miles away. He also said that the company’s strategy in India would include a major online presence. “We are quite committed to the Indian market and the ability to grow through that format.”

Online retailers in India have surged lately, earning $2.3 billion in 2013. However, there are prohibitive restrictions regarding the online access foreign retailers have to consumers directly; at least initially, Walmart’s cyber-sales strategy will focus on targeting small stores looking for convenient and inexpensive wholesale purchases. Indian regulators, anxious that huge retail chains will destroy local business, have been wary of giving them free reign in the marketplace.

Walmart’s experience in India has been infamously tumultuous. The company was investigated last year for allegedly violating  a prohibition against foreign investment in Indian supermarkets when, in 2010, it bought $100 million of convertible debentures from a retail unit of Indian Conglomerate Bharti Enterprise Ltd. A convertible debenture is a debt obligation that can be converted to stocks in the issuing company.  In Walmart’s case, the stocks were intended to provide an equity position in Bharti’s Easyday supermarket chain.

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Walmart defended itself claiming it was innocent of all charges and was eventually exonerated, declared in compliance with the country’s statutory and central bank regulations governing indirect investments by India’s Finance Ministry.

Also,  Walmart’s partnership with Bharti Enterprises was plagued with difficulties from the beginning. Under the original terms of their deal, Walmart owned a 50 percent stake in Bharti Walmart Private Limited to run wholesale cash-and-carry operations with the goal of serving small retailers, manufacturers and farmers. However, onerous restrictions on foreign investment in India have historically created a barrier to entry for foreign retailers, eventually proving too unwieldy a burden for Walmart to bear.

India is one component of Walmart’s aggressive plans for international growth. The company revealed its ambitious projections and plans for the next several fiscal years. Their eye-popping goal for 2016: $500 billion in sales, or about one-half of what J.C. Penney borrowed last year to shore up its capital reserves.

The capital spending for Walmart in 2015 will be generous, with plans to drop $11.8 billion to $12.8 billion. The primary focus of the spending strategy will be improved technology, e-commerce and omnichannel capabilities and small-store renovations.

The central pillar of Walmart’s retail strategy is expansion. The company is committed to opening as many as 300 additional stores in the U.S., including 115 new supercenters. The retailer increased it capital spending plan for the year by a staggering $600 million. Total spending for the year is projected to be between $12.4 billion and $13.4 billion.

But the number generating all the buzz is the robust prediction of half a trillion dollars by 2016, largely fueled by innovations in e-commerce strategies. Walmart expects to close out 2014 having captured $10 billion in internet sales.

For a company so intent on expansion, India must be an attractive destination, brimming with unrealized potential. Currently, India’s annual retail sales top about $400 billion but, according to the estimates of many experts, could reach as much as $800 billion by 2019.

Walmart’s commitment to growing its business remains unabated despite lackluster sales recently. For the fourth quarter which concluded January 31, same-store sales for Walmart’s U.S. locations dropped 0.4%, with Sam’s Club stores falling 0.1%. Doug McMillon, the new chief executive, acknowledged the problem. “Comp sales improvement is a key priority, and we’ll focus on being even stronger item and category merchants, delivering value and improving our service levels.”

Weaker-than-expected same-store sales have persisted throughout February as well, partly due to the severity of the winter weather, which has temporarily shuttered more than 200 stores. The retailer adjusted its per-share earnings estimate to $5.10 to $5.45, lower than the $5.54 analysts at Thomson Reuters were expecting.

Walmart warned that net sales will likely frustrate industry expectations, which could fall as much as $3.5 billion below previous forecasts. Net profit for the quarter dipped to $4.43 billion from $5.61 billion, or from $1.67 per share to $1.36 per share. Revenue, though, rose 1.5% to $129.7 billion. Walmart’s stock is down 4.9% this year.