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Wal-Mart has long epitomized the great side of American capitalism: its self-made billionaire founder, its highly efficient customer care and brilliant use of technology. Not only is it the world’s biggest company, it is arguably the most controversial. While it gets ready to launch its much-awaited store in India in collaboration with Sunil Mittal’s Bharti Enterprises, very few are aware that for the past seven years, Wal-Mart has been actively procuring products for its global stores from India.

 What might be even more surprising is the fact that most of these products, worth over $1 billion, are sourced from India. Of this, over $425 million is from the country’s small and medium enterprises, including cottage industries. So how did Indian SMEs build big businesses riding piggyback on Wal-Mart? And what lies ahead for them as the departmental store prepares to set foot in India?

Just over 150 km away from the bustling city of Coimbatore lies Karur, a small town teeming with entrepreneurs who supply to some of the biggest brands across the world. From a mere Rs. 3 crore economy in 1998, Karur has now grown to a thriving Rs. 3,000 crore economy!

According to Rajnish Kapur, General Manager of Wal-Mart Global Sourcing, India, “We have been going to small towns in India aggressively for sourcing; that’s why we are opening offices closer to bases in Delhi and Mumbai, to make growth more inclusive—cities like Karur, Panipat and Moradabad.” Revenues of some of these companies have grown to over $100 million from just $5 million.

Kitchen textile company JVS Exports was set up in 1931 by C. Swaminathan Mudalier with two handlooms and a mere $8. The baton has been passed to his grandson, Britto M. Joseph, who runs the company that has a turnover of over $40 million. This journey toward huge profits began when Britto walked into a Wal-Mart store near Chicago and saw one of his products on display. He quickly realized that striking a direct deal with stores like Wal-Mart would be much more beneficial than dealing with middlemen, who ultimately take home the profits.

So, in 1998, through Pacific Resource Enterprises (PREL), Wal-Mart’s then operating agency in India, Britto struck a deal for a Christmas promotional offer, which accounted for 50 percent of his company’s $1 million turnover that year. Says Britto, “The initial order was for dishcloths—200,000 promotional packs of 12. The value was about $750,000.” Today, JVS Exports supplies as many as 35 different items to Wal-Mart.

However, supplying to a global company like Wal-Mart has not been a cakewalk. Being a regular supplier to the store meant boosting production facilities to meet the numbers, while ensuring world-class product quality. This naturally meant upgrading machines, manpower and investment.

“My first order was in a handloom or a basic power loom that had two limitations—no bulk and no quality. I then switched to shuttlers loom and I’m now meeting both the quality and quantity challenges. A normal power loom costs about $1,000 and a normal handloom costs $200. Shuttlers loom, on the other hand, costs about $100,000, but it provides us with both production and quality. We have to do this to stay in the market and continue serving customers like Wal-Mart,” Britto explains.

Today, JVS Exports’ supply figure to Wal-Mart has touched the $14 million mark, significantly up from the $750,000 in 1998. Having added 35 new products to their supply portfolio, not only has their network grown to over 3,500 stores in the United States, but they also enjoy some key advantages for expansion. “Supplying to Wal-Mart has been a major marketing tool for me,” says a proud Britto, “Because I was a supplier to Wal-Mart, I was able to supply to one among the top ten stores in America, Canada, England and even South Africa. My association with Wal-Mart has changed my life, especially since I lost a key customer around that time. I was struggling to find customers around the world. Had it not been for Wal-Mart, I would have never reached this level.”

Further south of Coimbatore is Alleppey, where 90 percent of the population are weavers. Every villager here has two or three looms in their homes to produce coir and jute mats that are 100 percent natural in fiber. Unfortunately for them, the government has chosen to not get too involved in the development of this industry, especially in terms of technological upgradation and R&D.

Koncherry Weavers started supplying coir and jute mats to Wal-Mart in 2004. The company acquires these coir and jute rugs from cottage industries and processes and packages them in its own factories. Its first order of 700 tonnes of jute rugs was worth about $3.5 million in 2004; to meet that first order, the company had to employ 10,000 workers. Says Kapur, “We develop strategies according to the country’s core competency. Having established that there are strengths in the handloom and cottage industry, it is up to us to upgrade those facilities. We also believe in sustainable sourcing—getting these facilities to understand the impact they can have on the world at large and on consumers who buy their products.”

About 90 percent of what Wal-Mart procures in the rug and doormat categories are machine-made products, due to the volume and low prices. But Koncherry Weavers is struggling to meet the working capital, as bank loans have become costly and earnings haven fallen by 12 percent in the last few months due to the rising value of the rupee, which lost 17.3 percent this year, the most since 1991.

But K.S. Shaji, CEO of Koncherry Weavers, has already invested close to $5 million in machines and plans to invest more to ensure that the company remains a regular Wal-Mart supplier.

There is good news for employees of this booming private industry, too. In India, it has spurred thousands of jobs. According to Welspun, supplier of towels and sheets, there are in-line inspections conducted during production, pre-shipment inspections, audits for the company in terms of whether systems are in place, and a keen eye on the corporate code of conduct with regards to employees. For instance, JVS Exports started with 100 workers five years ago; today, it employs about 800 people, 80 percent of whom are women. Most of these employees have studied only till middle school, but are now supplementing their household income.

In order to bag the crucial Wal-Mart order, SMEs are spending on their workers and communities. While constructing their factory, JVS Exports found out that the water in the nearby area was not even suitable for construction. Hence, once the factory was up and running in 2002, they decided to set up a reverse osmosis water plant, which supplies water not only to factory workers but their families as well.

So, with Wal-Mart now ready to open shop in India, what’s in store for these SMEs? Indian SMEs are bullish on Wal-Mart’s approval for a full-fledged operation in India. It could bump up the $1 billion annual Indian sourcing figure significantly. “We are constantly looking for new products and product lines, and as a new product line evolves, I’m sure vendors will add up,” says Kapur. “We are looking at more penetration in leather, accessories, electronics and footwear. We are always looking for new partners as we grow together.”

Tara Jewels, who is in talks with Wal-Mart to supply jewelry for the Indian market, doesn’t seem too fazed: “It would affect us, of course, but by the business going up, not down!” JVS Exports adopts a similar attitude, saying, “The initial sample process is done and the quotes have been given. We are just waiting for them to give us the orders.”

But as they say, putting all your eggs in one basket is not advisable. With dependence on Wal-Mart as high as 50 percent in some cases, Indian companies are fast shifting tracks and eyeing other big retailers, Reliance Retail being the biggest. JVS Exports recently started selling to Reliance and is in talks with Trinetra. “We have also set up our Indian retail division,” says Britto. “We will set up offices in Hyderabad, Bangalore, Chennai and Delhi to concentrate on the Indian markets. Apart from that, we are also tracking the hospital and hotel industry”. Koncherry Weavers, too, has started supplying to Reliance. “If we bring down the cost and amp up the quality, I think we can get a good share in the market,” says Shaji.

Indian SMEs have developed big businesses, despite having to deal with a tough business partner like Wal-Mart. In the process, entire communities have benefited—and this is only the beginning for Indian SMEs. Big, booming retail is set to throw open bigger opportunities for them and their communities, some of which are a few hundred years old. Reforms do have a human side, after all.

©Entrepreneur November 2009

Tags:
JVS Exports, K.S. Shaji, Koncherry Weavers, Tara Jewels, Wal-Mart