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

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SummaryUK retailer to set up 3-5 new stores a year, to use Trent’s 16 Star Bazaars for now.

Tesco, the world’s third-largest retailer, will soon be a player in India’s $490-billion retail space, setting up stores in India in partnership with the Tata-owned Trent Hypermarket (THL).

The UK-based retailer’s 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 Tata’s 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 Trent’s 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 Tata’s unrivaled understanding of the Indian market has tremendous potential and we’re excited to be exploring ways to do more together,” Tesco Asia’s chief executive officer Trevor Masters said. The UK retailer currently supplies close to 80% of the products sold in Trent’s 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 world’s third largest retailer trim costs and develop local expertise before opening shops here. At £370 million, sourcing from India accounts for 7% of Tesco’s 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

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