First FDI in multi-brand retail as Tesco teams up with Tatas

Written by fe Bureau | Mumbai/ New Delhi | Updated: Dec 18 2013, 15:17pm hrs
Tesco, the worlds third-largest retailer, will soon be a player in Indias $490-billion retail space, setting up stores in India in partnership with the Tata-owned Trent Hypermarket (THL).

The UK-based retailers application to the Foreign Investment Promotion Board (FIPB) to open multi-brand outlets will be the first the government receives after it threw open multi-brand retail to FDI in September 2012. Although WalMart has had a presence in India, since 2007, in partnership with the Bharti Group, it is yet to venture into the front-end.

Although foreign retailers are permitted to hold 51% of the equity in a multi-brand venture, Tesco will pick up a 50% stake in Tatas Trent Hypermarket, investing $110 million or approximately R684 crore, over three years. The firm appears to have shrugged aside concerns on mandatory local sourcing of up to 30% from small and medium enterprises and apprehensions of any change in regulation.

Tesco will set up three to five new stores a year, Saurabh Chandra, secretary, DIPP, told FE, adding brownfield investments in the front-end were permitted as long as half the initial mandatory investment of $100 million was spent on back-end infrastructure. The idea is to have additionality, Chandra observed, adding that the sizes of the new stores to be opened has not been specified by the government.

Tesco will initially use Trents existing 16 Star Bazaar stores but will, within 3 years, invest another $50 million in creating new facilities in Maharashtra and Karnataka. We believe combining our global retail expertise and Tatas unrivaled understanding of the Indian market has tremendous potential and were excited to be exploring ways to do more together, Tesco Asias chief executive officer Trevor Masters said. The UK retailer currently supplies close to 80% of the products sold in Trents Star Bazaar hypermarkets.

The size of the organised retail space in India is estimated at close to $40 billion.

Last year, Tesco, which earns global revenues of 72 billion, had set up an Indian subsidiary to buy fresh and processed foods from the country to supply globally in a move that could help the worlds third largest retailer trim costs and develop local expertise before opening shops here. At 370 million, sourcing from India accounts for 7% of Tescos total international sourcing.

Tesco may also set up outlets other than Star Bazaars, such as Star Daily and Star Market. In FY13, Star Bazaar reported revenues of R801 crore and a loss of R72 crore. In 2008, Tesco tied up with Trent to provide back-end support to the Star Bazaar chain; earlier in 2004, the Tesco Hindustan Service Centre, which employs 6,500 people, was set up in Bangalore.

In May, Tesco CEO Philip Clarke and Trent vice-chairman Noel Tata had met commerce and industry minister Anand Sharma to seek clarifications on the policy. The rules require that at least 50% of the first tranche of $100 million must be spent on back-end infrastructure within three years. Moreover, at least 30% of the manufactured and processed products need to be sourced from small enterprises with a capital investment of up to $2 million; this was earlier $1 million.

However, global retailers need permission from state governments before they can operate.

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 Tescos unparalleled global retail expertise will allow us to leverage the tremendous potential of the market to the benefit of all stakeholders, Noel Tata, vice-chairman of Trent, said in a statement.

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 Indias retail industry. I am sure other global leaders will also look at investing in India, commerce and industry minister Anand Sharma, said. Tesco accepting the FDI in multi-brand retail policy means that the policy is workable. Moreover, it is focusing on two states only, namely Maharashtra and Karnataka, both of which are FDI-compliant, said Arvind Singhal, chairman and managing director of advisory firm Technopak.