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Posted at 6:53 AM ET, 01/27/2011

Trading onions for Foreign Direct Investment

By Raju Narisetti

With inflation running at 15 percent in some food categories and the price of onions putting the Indian government on the defensive, top executives from Wal-Mart Stores Corp. are making a concerted push at the Davos to sell India's cabinet ministers on the idea of allowing much higher levels of Foreign Direct Investment in retailing in that booming but notoriously difficult market.

Their pitch: allow us to invest in more stores and make more profits so we can plow money back into India's food supply and cold storage infrastructure, which, in turn, can help Wal-Mart keep prices low on essential consumer products.

"Part of our DNA is finding ways to lower costs so we can hold down inflation, be it in India or elsewhere," said Mike Duke, CEO of Wal-Mart.

The "Indian retail opportunity is terrific," added Doug McMillon, president and CEO of Walmart International. McMillion said the retail giant wants to "make a case we can help with inflation" there.

In India, Wal-Mart is deliberately selling onions "at cost" to address a consumer point, McMillon said.

India is importing at least 700 metric tons of onions, a staple in local cuisine, to mitigate sharp price increases that resulted from a late rainy season that impacted the domestic crop.

Wal-Mart operates 100 small stores and a handful of medium-sized stores under the Easy Day brand in India, a minuscule sliver of that large retail market, in a franchise relationship with Bharti, a large Indian conglomerate.

In a wide-ranging conversation, McMillon and Duke spoke to a small group of journalists at an early morning private breakfast Thursday morning on the sidelines of the World Economic Forum in Davos.

With 200 million customers showing up at their stores each week--some 150 million of them in the U.S.--Wal-Mart remains a key bellwether for economic trends, especially as it relates to consumer sentiment.

Duke gave a less-than optimistic view of consumer sentiment in the United States, noting that both unemployment and fear of unemployment was still a major overhang especially in middle and low-income households.

While many have taken recent high unemployment data in the U.S. for granted, for many Wal-Mart customers it is "either real (joblessness) or a fear (of losing their jobs), Duke said. That fear is showing up both in higher unemployment markets such as California and Nevada as we'll as in places that tend to be more stable, he noted.

He said President Obama's focus on jobs and competitiveness is "the right focus" in first reducing consumer fear, even if the actual jobs impact might not be immediate.

Duke also said that the U.S. could yet again become more competitive with its focus on "green jobs," and could benefit from China's rising wage rates. Chinese manufacturing is shifting away from higher-cost coastal cities to the hinterland and higher labor costs are forcing Chinese business to step up productivit. This could create an "opportunity" for the U.S., Duke said, especially as Wal-Mart focuses on permanently reducing supply chain costs.

Duke said he is betting on energy costs to continue rising and is pushing Wal-Mart to focus, in the long run, on sourcing products with high transportation costs closer to where they are consumed.

McMillon added that increasingly, Wal-Mart is able to send shipping containers--which used to return empty from the U.S. after unloading products manufactured in China and elsewhere overseas--with North American-made products that are selling well in its stores abroad.

He cited bottled water from Canada, apples from Washington state, Hershey chocolates, cream cheese and kettle chips as examples.

Both McMillon and Duke gave a very optimistic assessment of international operations, especially in the United Kingdom and in Mexico. Wal-Mart has been in Mexico since 1991, under the Bodega Aurrera brand. Acknowledging rising concerns about deteriorating internal security in Mexico, McMillon said it "hasn't been a problem all over the country."

"There are security issues" at the individual stores level, he said. Each store had to "learn how to make tactical adjustments."

Circling back to the subject of India, ahead of his meetings with key members of the Indian government, McMillon said Wal-Mart "understands there is a lot of politics at play" when it comes to allowing higher direct foreign investment in India's retail sector.

"Hopefully some day India will present a great opportunity for growth," he said.

By Raju Narisetti  | January 27, 2011; 6:53 AM ET
Categories:  Raju Narisetti  
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