By Nandita Bose
MUMBAI (Reuters) - Wal-Mart Stores Inc (WMT) and Bharti Enterprises are breaking up their Indian joint venture, leaving the world's biggest retailer to go it alone in a country where it has struggled to build a bigger presence.
Bentonville, Arkansas-based Wal-Mart, the world's largest retailer, will take over its Indian partner's 50 percent stake in Bharti Wal-Mart Pvt Ltd, which runs 20 wholesale stores under the Best Price Modern Wholesale brand.
However, if Wal-Mart wants to set up its own retail stores in Asia's third-largest economy, it will need to find another local partner to own 49 percent of the business under foreign investment rules that were eased last year.
Wal-Mart tied up with Bharti in 2007 and had been the most vocal proponent of prying open India's restrictive retail market to foreign supermarket operators.
But its growth in India has been hindered by still-evolving rules on foreign investment, an internal bribery probe, and, more recently, the faltering partnership with New Delhi-based Bharti, which Reuters reported in July.
Wal-Mart has not opened a wholesale, or cash-and-carry, store in India for about a year, despite earlier plans to open eight in 2013.
"Wal-Mart can now focus on getting its act clean in India and start afresh," Saloni Nangia, president for retail at Technopak Consultants.
Late last year, the company's Indian joint venture suspended employees, including the chief financial officer, as part of an internal investigation into bribery allegations in India and subsequently brought in a team of lawyers from a U.S. firm to strengthen compliance.
Focusing on the wholesale business for now will enable Wal-Mart to build up its supply chain to support future retail stores, analysts said.
"Wal-Mart can now take over the wholesale business, grow it at its own pace with the investment it sees fit and it could now get aggressive in the market," said Devangshu Dutta, who heads Bangalore-based retail consultancy, Third Eyesight.
For Bharti, which is also the parent company of Bharti Airtel (NSI:BHARTIARTL), India's biggest mobile phone carrier, the break-up with Wal-Mart means it loses a deep-pocketed partner to support its retail expansion. Bharti operates the 212-store easyday chain and said it will continue to invest in and grow the business.
BIG POTENTIAL, BIG CHALLENGE
India last year allowed foreign supermarket companies to own up to 51 percent of their local operations, but no company has applied to enter Asia's third-largest economy under the rule.
Despite the vast opportunities - roughly 90 percent of the $500 billion retail market is done at one-off mom-and-pop shops - expensive real estate, underdeveloped supply chains and fierce price competition mean margins are razor-thin and most big supermarket operators lose money.
Some officials at global retailers have said privately they are waiting for the outcome of national elections due by May before applying to operate in India in case the controversial rule allowing foreign direct investment in supermarkets is overturned by a new government.
Wal-Mart said on Wednesday it will work with the government to create conditions that enable foreign direct investment in the country's supermarket sector.
"Given the circumstances, our decision to operate independently will be beneficial to both parties," Scott Price, president and chief executive of Wal-Mart Asia, said in a statement. "Wal-Mart is committed to businesses that serve our members and provide good returns for our shareholders and we will continue to advocate for investment conditions that allow FDI multi-brand retail in India," he said.
(Editing by Tony Munroe and Matt Driskill)