Tescos vegetable basket wins sourcing reprieve

Written by Kirtika Suneja | New Delhi | Updated: May 17 2013, 08:21am hrs
The worlds third-largest retailer, UKs Tesco Plc, has managed to extract a major concession from the Indian government which could see it set up shop in India. The department of industrial policy and promotion (DIPP) has assured the retailer that the 30% sourcing norm from Indian medium and small enterprises (MSMEs) would apply to only 15% of its product portfolio were it to open stores in the front-end segment.

DIPP officials told FE that since sourcing rules related only to manufactured and processed products, it would not apply to Tesco. Tesco had pointed out to the ministry that 85% of products it proposes to sell through its multi-brand retail outlets in India, would comprise fruits and vegetables or products made from these and would be sourced directly from farmers. The question of sourcing from MSMEs, therefore, did not arise, Tesco had explained.

Tesco had asked if farm produce would be kept outside the ambit of this clause and we felt that unprocessed and dairy products should not be included. The clause will apply only to processed and manufactured products, a DIPP official told FE. Tesco set up an Indian subsidiary in December 2012 to buy fresh and processed foods from the country for its global stores.

Tescos CEO Philip Clarke and Noel Tata, MD, Tata International and vice-chairman, Trent had met commerce and industry minister Anand Sharma last week to seek clarification on whether the produce it acquired from farmers would qualify as a procurement from the MSME segment. Earlier in the week, Tescos query on whether the minimum investment in back-end infrastructure, of 50%, would apply to the initial investment or the cumulative investments was also answered by the government, which clarified that it related to only the first tranche of investment.

In the year to February, 23, 2013, Tesco, which runs 6,784 stores worldwide, clocked revenues of 72.4 billion pounds and a profit before tax of 3.5 billion pounds. With an employee base of 5.2 lakh, the company is present in 12 markets.

The clarification to Tesco is in line with what Sharma had said earlier that while there would be no changes in the policy for FDI in multi-brand retail, his ministry would examine issues on a case-by-case basis and provide clarification. The government is keen that investments in the multi-brand retail sector come in after allowing foreign retailers September 2012 to hold up to 51% in such ventures.

The relaxation for Tesco will come as a breather for foreign firms interested in investing in consumer durable stores in India. Such stores do not need the kind of investments the government has stipulated for creating back-end infrastructure minimum investment of $100 million in first tranche and 50% of it to be in back-end. Industry sources said may be if such firms meet the minister or his officials and present the peculiarities of their businesses, some relaxation may be offered to them.

Relief for Tesco also comes after the DIPP clarified on another issue on which the retail industry had raised concerns the minimum investment required in the back-end whether it would be one-time or recurring and whether it would apply only to greenfield ventures or brownfield as well.

The DIPP has clarified that the minimum investment requirement of 50% of the total FDI brought in to be invested in the back-end operations would be applicable only to the first tranche of investment. In all subsequent tranches, the companies will be free to invest in the front-end or back-end as per their business sense. This norm would apply to greenfield as well as brownfield retail ventures.

Earlier, Sharma had initiated a major change in the single-brand retail segment for foreign firms interested in setting up 100% subsidiaries in the country. Swedish furniture maker Ikea had problems with the mandatory 30% sourcing from MSMEs with a turnover of $1 million. The minister changed the clause from mandatory to preferably which saw the company committing to invest Rs 10,500 crore in the country over a 10-year period.

UKs Tesco currently operates a wholesale business in Mumbai supplying products to Star Bazaar - stores operated by Trent, which is the retail arm of Tata Group. It has a franchise arrangement with Trent to help it with the growth of the Star Bazaar chain. The company has two offices in Bangalore and Delhi, which source over 300 million pounds worth of products a year from India. Bangalore is also home to the firms Hindustan Service Centre which employs over 6,000 people.

In our less mature markets China, Turkey and India we will focus our efforts on establishing and then pursuing a profitable approach to growth, a recent company statement said.

Multi-brand rules relaxed for Tesco

After single-brand retail, DIPP dilutes rules for FDI in multi-brand retail.

* Carrefour goes slow on India plans, seeks clarity on 30% mandatory sourcing from SMEs, at least 50% investment in backend infra and state-wise approvals.

* Tesco wrote to DIPP on sourcing clause and if 30% purchase of manufactured goods from the small scale sector would also extend to food products. It operates a wholesale business in Mumbai supplying products to Star Bazaarstores operated by Trent.

* Walmart too seeks clarity on sourcing, back-end infrastructure investment.

* Marks & Spencer asked by DIPP to

apply afresh under multi-brand retailing as the present business model of selling sub-brands does not fall under single-brand retail policy