Tesco to enter Indian retail space through joint venture with Tatas

To be the first foreign multi-brand chain to enter the country's market

Ministers often sound optimistic even when there are no obvious reasons. So, when Commerce & Industry Minister Anand Sharma told a reporter on Monday that the first application from a foreign multi-brand retailing entity would come by the end of this month, there was an air of suspicion, as most experts had ruled out any investment in this sector until after the 2014 elections.

However, Tesco Plc, the British multinational grocery & general merchandise retailer, sprang a surprise on Tuesday by announcing its intention to be the first foreign multi-brand chain to enter the Indian market, a little over a year after the country’s policy on foreign direct investment (FDI) in the segment was relaxed.

Extending its back-end and wholesale support franchise agreement with the Tata Group’s Trent, Tesco will invest $110 million (Rs 680 crore) in the India market for front-end multi-brand retail stores. This investment, believed to be for the first three years of business, is likely to be increased later. For now, Tesco has plans to invest only in Karnataka and Maharashtra.

WHAT’S TESCO?

• HEADQUARTERS: Cheshunt, Hertfordshire, England
• LISTED ON: The London Stock Exchange
• REVENUE: £64.8 billion last year
• STORES: Runs over 6,000 outlets across the UK, Europe, Asia (exited the US market recently)
• RANGE: Cash & carry, convenience store, department store, discount store, hypermarket/supermarket
• INDIA PRESENCE:Since 2008 under a JV with Tata Group’s Trent

Aside from the Trent business being established in the western and southern regions of India, the UK retailer may have chosen Karnataka and Maharashtra for political reasons as well. The Congress party, which has been backing FDI in retail, is in power in both these states. While Karnataka next goes to polls in May 2018, Maharashtra is slated for Assembly elections in December 2014. The multi-brand retail policy allows states to take a call on whether or not foreign retailers can open stores. BJP and other Opposition parties, including the Aam Aadmi Party, are against FDI in retail.

People in India would get to experience the Tesco stores soon after the company has got clearances from the government, as the Trent hypermarkets are to be converted to UK-branded outlets.

In May, Group CEO Philip Clarke had met Anand Sharma for a discussion on multi-brand retail policy, but the firm had stayed low key about its proposed India entry. The general expectation was that American chain Walmart, which has been much in news, would be the first foreign retailer to set shop India. Apart from internal investigations into Walmart’s compliance with the US’ Foreign Corrupt Practices Act, the chain had to face political opposition in India for its lobbying disclosures to the US Senate.

At present, Tesco is the only foreign chain with an Indian partner. Walmart recently broke up with Bharti and French retailer Carrefour is yet to find a partner. Another foreign retailer sounding positive on the India market is Japanese major Aeon, which has set up a small office in the country. When contacted, its spokesperson said the company was still “researching” the country’s market.

An official at the Department of Industrial Policy and Promotion (DIPP) confirmed a proposal had been received from Tesco Overseas Investment Ltd for approval of 50 per cent FDI in the issued and paid up equity share capital of Trent Hypermarket Ltd (THL), a Tata group enterprise, to engage in the activities of multi-brand retailing. According to the proposal, the JV will operate in India through a chain of stores under various banners, including Star Bazaar, Star Daily, Star Market — their tag line saying ‘A Tata and Tesco Enterprise’. THL planned to open three to five stores every financial year, the official added.

In a statement, the Tata group said Trent and Tesco had been in discussions over an investment by Tesco in THL, which operates the Star Bazaar business and is engaged in multi-brand retailing. “In this context, Tesco is making an application to the Foreign Investment Promotion Board. If the application is successful, the intent would be to enter into a partnership, where Trent and Tesco will each own a 50 per cent stake in THL.” On BSE, Trent shares rose around seven per cent over their previous close to end the day at Rs 1,066.55.

Trent Vice-Chairman Noel Tata said: “The application is a positive step forward in the relationship between the Tata group and Tesco.”

Anand Sharma, who has been much criticized for making an industry-unfriendly policy, on Tuesday said: “We hope this will mark a new beginning in transforming India’s retail industry. I am sure other global leaders will also look at investing in India.”

However, some of the multi-brand policy riders might still be a challenge to comply with, experts said. For instance, a minimum compulsory investment of $100 million needs to be made in new facilities and must not include acquisition of existing stores or infrastructure of the partner. At least 50 per cent investment in back-end infrastructure and a mandatory 30 per cent sourcing from micro, small and medium enterprises (MSMEs) are among the other tough riders. But, now that a proposal for FDI in the sector has finally come, the government might tweak the rule book.

Arvind Singhal, chairman of retail consultancy Technopak Advisors, said: “Tesco’s coming is very good news, not just for the retail sector but also for India.” A marquee name like Tesco would mean an endorsement for destination India, he added.

Another retail watcher, Third Eyesight CEO Devangshu Dutta, said: “When Tesco got into a partnership with the Tatas, the intent was to look at retail, and not back-end. Whenever Tesco has expanded into new markets, it has undertaken a high level of localisation. In partnership with the Tatas, they worked in the back end, so it’s logical to take this partnership to a joint venture in retailing.”

“We have been working with the Tata group in India for over five years, supporting the development of their Star Bazaar and Star Daily multi-brand retail stores through the provision of wholesale and franchise agreements,” said a spokesperson for Tesco.

Meanwhile, Tesco’s Asia CEO Trevor Masters blogged: “We really like working with the Tata group in India,” adding “we believe combining our global retail expertise and Tata’s unrivalled understanding of the Indian market has tremendous potential and we’re excited to be exploring ways to do more together”.