British retailer Tesco has sought Centre’s permission to set up a 50:50 joint venture with Tata Group’s retail arm Trent for setting up a chain of supermarkets, the first since the government opened up the multi-brand retail sector to global players over a year ago.
The move will come as a boost for the beleaguered UPA, which is battling voters’ anger over high prices. The Congress-led coalition had risked its existence after allies such as Trinamool Congress walked out, protesting the move to open up multi-brand retail to foreign players. The policy has been showcased as one of the bold reforms that the UPA has undertaken, which is expected to bring down stubborn inflation in the long-term by reducing wastage in the supply chain.
A senior government official said Tesco plans to invest $110 million (around Rs 700 crore) initially to set up stores in Karnataka and Maharashtra, two Congress-ruled states. Tesco — the world’s third largest retailer — filed an application with the department of industrial policy and promotion and has indicated that Trent Hypermarket will operate under Star Bazar, Star Daily, Star Market brands.
Trent Hypermarket plans to open three to five stores every financial year and will have a significant focus on the food segment. The Tatas and Tesco have a tie-up for the wholesale cash-and-carry segment with their stores selling to kirana shops, canteens and restaurants, among other bulk buyers. Once the government approves the new proposal, Trent Hypermarket will be able to sell directly to individuals.
“We have always said we’d like to get more involved in this exciting market and we are submitting an application to the government which, if successful, would allow us to enter into a joint venture with Trent Hypermarket. Any such relationship would be announced in the usual manner,” a Tesco spokesperson said.
“We welcome the decision of Tesco to invest in India. We welcome this development and on our part assure them all support for expedited clearances. To begin with, they propose to establish their stores in Maharashtra and Karnataka. We hope that this will mark a new beginning in transforming India’s retail industry. I am sure that the other global leaders will also look at investing in India,” commerce and industry minister Anand Sharma said in a statement.
While several foreign players such as Walmart and Carrefour have shown interest, none of them have made much progress. Walmart, the world’s largest retailer, has stayed away from the multibrand segment, citing tough conditions imposed by the government. While allowing 51% FDI, the government had made it mandatory to source locally and had set stringent investment rules for back-end infrastructure. Walmart recently ended its seven-year partnership with Bharti Group, which is now going solo in the business.
Nov 24, 2011: Cabinet allows 51% FDI in multi-brand retail
Dec 7 : Govt suspends decision to open up retail until “consensus” is reached
Sept 14, 2012 : Cabinet reopens sector for FDI
Sept 20 : Govt notifies decision
According to an investment proposal submitted by Tesco Overseas Investment Ltd to the government on Tuesday, the UK retailer plans to own 50% in Trent Hypermarkets Ltd, the company that at present runs a chain of 16 Star Bazaar hypermarkets in Maharashtra, Karnataka, Gujarat, and Tamil Nadu. The proposed partnership will operate and build on the existing portfolio of Star Bazaar stores in Maharashtra and Karnataka only, as the other two states have banned foreign investment in retail.
“We have got Tesco’s application. We will go through the proposal and hope to send it to the Foreign Investment Promotion Board by next week. They have not sought any clarification about the foreign investment policy from us,” said a senior official of the Department of Industrial Promotion and Policy. The Tata-Tesco JV will not use the Tesco brand for its stores in India.
It will sell various items from food to fashion-wear in Star Bazaar, Star Daily and Star Market branded outlets, with a ‘A Tata and Tesco Enterprise’ tagline. The joint venture has a modest target of opening three to five stores every year. Tesco’s investment proposal will no doubt come as a welcome relief for commerce and industry minister Anand Sharma as well as the UPA government which last year put its own survival at stake over the issue of allowing foreign direct investment in the retail sector only to discover that political uncertainty and stringent entry norms were discouraging foreign companies from investing in the sector.
“We welcome this development and on our part assure them all support for expedited clearances. We hope that this will mark a new beginning in transforming India’s retail industry,” said Sharma.
Big Indian retailers have welcomed Tesco’s move and expressed the hope that more such deals happen soon.
“The deal will encourage other global retail giants to look at India for FDI in multi-brand retail and more such deals may now happen,” said Future Group chairman Kishore Biyani. Future Group has in the past been in discussions with several foreign retail chains including Carrefour of France.
Spencer’s Retail owner Sanjiv Goenka said a lot of overseas retailers were looking at the market seriously. Hopefully, it’s now a matter of time that other such deals get inked,” Goenka said.
Trent, the Indian company opened an 1,800-sq ft convenience store in Pune that was modeled on Tesco Express, the neighborhood store format of the world’s third largest retailer. Over the last one year, many of the existing Star Bazaar outlets were redesigned or refitted to conform to Tesco’s specification, in what now appears to be a run-up to Tuesday’s investment application.
Some industry experts, however, expressed surprise at Tesco’s decision. “I am surprised in terms of the timing of the proposal as foreign retailers have indicated that the environment was unpredictable and they were adopting a wait-and-watch policy. BJP has taken a strong stand on the issue in the last one year or so and many of the regional parties are anti-FDI in retail as well,” he said.
At present, foreign direct investment investment in retail stores is allowed in only 11 states and union territories in India, most of whom are ruled by the Congress and its UPA partners. With elections scheduled in some states next year, the number could go down even further and a change in government at the centre could complicate the situation further.
Tesco will have to confront this political complexity immediately as Trent Hypermarkets operates in two states — Gujarat and Tamil Nadu — which do not allow foreign investment in retail. Unless the governments of these two states have a change of heart, the stores in these states will have to be excluded from the Tesco-Trent partnership.
A senior Tesco executive acknowledged the challenges of entering the Indian market but described it as exciting opportunity. “With a population of 1.2 billion people and an enormous range of economic and social classes, languages, religions, cultures and geographies, India is one of the most diverse markets in the world,” Trevor Masters, Tesco’s head of Asia wrote in a company blog on Tuesday announcing the company’s plans to invest in India. “This presents its own challenges but it’s also what makes India such an exciting opportunity. The incomes and expectations of consumers have changed dramatically in the last five years and will continue to do so – India is still one of the fastest growing economies in the world,” he added.
Tesco’s proposed investment in Trent Hypermarkets will deepen the relationship between the two partners. In 2008, the UK company had signed a franchisee agreement with Trent to provide technological expertise and supply products to the Tata company. At present Tesco supplies around 80% of merchandises that is sold in the 16 Star Bazaar and Star Daily store in western and southern India.
“The application is a positive step forward in the relationship between the Tata Group and Tesco. We believe that our understanding of the Indian market coupled with Tesco’s unparalleled global retail expertise will allow us to leverage the tremendous potential of the market,” said Trent vice chairman Noel Tata.
The Tesco application says it will abide by FDI in multi-brand retailing regulations including the mandatory 30% sourcing from tiny Indian suppliers that many foreign retailers including Walmart said was too stringent.
Walmart broke its partnership with Bharti in October and since then top Bharti Retail executives have been in discussions with Tesco for a possible partnership. It is possible that the Tesco-Trent joint venture could look to expand in north India through a partnership with Bharti, but this could not be confirmed.