On Tuesday, UKs Tesco announced that it would set up stores in India in partnership with the Tata-owned Trent Hypermarket (THL). Tesco will invest $110 million, or R684 crore, over three years.
From the discussions that we are having now, the third format is likely to be positioned as a mid-sized format between Star Daily and Star Bazaar. We need to wait for some more time to see how the expansion plays out, a Trent executive said on condition of anonymity. The stores may range between 20,000 square feet and 30,000 square feet.
There are no plans of the Star Market stores being larger than the Star Bazaar stores, the executive added.
On Tuesday, the company said Tesco may also set up outlets other than Star Bazaars such as Star Daily and Star Market, under the tag line A Tata and Tesco Enterprise.
The Trent executive also said that the new stores with Tesco will first be opened in bigger cities of Maharashtra and Karnataka like Mumbai, Pune and Bangalore and then in smaller cities.
Incidentally, Tescos chief executive officer Philip Clarke had mentioned earlier this year that the company is unlikely to open any more stores over 22,500 sq feet in future, and all its existing stores over that size are likely to change markedly.
In October, Trent had opened its first neighbourhood store in Pune Star Daily across 2,000 square feet, modeled along the lines of Tesco Express, which has a similar store size. More Star Daily stores will be rolled out in Pune before they are set up in other cities.
Trents hypermarket format comprising 16 Star Bazaars are spread over 50,000-80,000 square feet. The retailer has been cautious with the expansion of Star Bazaar; not opening a single store in FY13. The company opened just one store during the first half of FY14.
Trent had plans of opening smaller Star Bazaar outlets across 30,000 square feet in order to cut down on rentals and to break-even sooner. The company has also decided not to open Star Bazaar hypermarkets inside large shopping malls due to high common area maintenance costs, Rents in India account for 9-15% of retailers revenues, higher than the global average of 410%, according to a report by real estate consultant Jones Lang LaSalle.
In FY13, THL reported a 21% increase in total revenue at R785.1 crore, while its earnings before interest, tax (Ebit) was negative at R64 crore. This (Star Bazaar) business continues to incur operational losses, especially on account of the under absorption of corporate costs. We believe this trend would continue until the business evolves into a sustainable model and consequently reaches a critical mass, the company had said in its annual report.
After the FDI announcement on Tuesday, Trent shares closed up 10.4% at R1,178 on Wednesday on the BSE.