Sop for Tesco opens FDI path for oth­ers

Can now use ex­ist­ing fa­cil­i­ties of lo­cal part­ners

The Financial Express - - FRONT PAGE - Fe Bureau

WITH the For­eign In­vest­ment Pro­mo­tion Board clear­ance for Tesco’s $110mil­lion joint ven­ture with Trent Hy­per­mar­ket mak­ing a crit­i­cal con­ces­sion in terms of al­low­ing for­eign re­tail­ers to buy brown­field re­tail ven­tures in In­dia — as long as they also com­mit to in­vest­ing in fresh green­field stores within three years — the stage is set for sev­eral other for­eign re­tail­ers to en­ter into tie-ups with ex­ist­ing In­dian or­gan­ised re­tail chains.

While this con­ces­sion was not forth­com­ing at the time Wal-Mart was ne­go­ti­at­ing with the com­merce min­istry — this would have al­lowed the Amer­i­can re­tail gi­ant to use Bharti’s Easy­day re­tail stores in the ini­tial years — the gover nment ap­pears to have changed its stance af­ter no global re­tailer came for­ward to set up shop in In­dia.

Tesco will be the first multi-brand global re­tailer to set shop in the coun­try af­ter the gov­ern­ment in Septem­ber 2012 al­lowed for­eign re­tail­ers to in­vest in In­dia in part­ner­ship with In­dian firms sub­ject to an eq­uity cap of 51%. Wal-Mart was ex­pected to be the first global re­tailer to set up front-end stores given it had a 50:50 joint ven­ture with Su­nil Mit­tal's Bharti En­ter­prises in the cash-and-carry seg­ment since 2007. How­ever, in Oc­to­ber the joint ven­ture was called off.

On Mon­day, the FIPB cleared the UK re­tailer’s $110mil­lion (Rs 684 crore) pro­pos- al, which in­cludes pick­ing up a 50% stake in Trent Hy­per­mar­ket. The world's third­largest re­tailer, Tesco al­ready has a cash-and-carry ven­ture in In­dia. Since the in­vest­ment is be­low Rs 1,200 crore, Tesco does not re­quire any more reg­u­la­tory ap­provals. Only for­eign in­vest­ments above Rs 1,200 crore re­quire the ap­proval of the Cab­i­net Com­mit­tee on Eco­nomic Af­fairs af­ter the FIPB nod.

Since the gov­ern­ment's pol­icy for for­eign re­tail­ers comes at­tached with a string of con­di­tions re­lat­ing to back-end in­vest­ment and sourc­ing from lo­cal small and medium en­ter­prises, Tesco's ex­pe­ri­ence will be keenly watched by other global re­tail ma­jors. The de­vel­op­ment would be seen as a big boost for the UPA gov­ern­ment, which has been try­ing to con­vince for­eign multi-brand re­tail­ers to in­vest in In­dia. While sev­eral in­vest­ments have been made in the sin­gle­brand seg­ment, multi-brand re­tail­ers had so far not found the con­di­tions at­trac­tive.

Tesco will ini­tially use Trent’s ex­ist­ing 16 Star Bazaar stores but will, within three years, in­vest another $50 mil­lion in cre­at­ing new fa­cil­i­ties in Ma­ha­rash­tra and Kar­nataka. The joint ven­ture firm would re­tail 15 prod­uct lines, which in­cludes ce­re­als, veg­eta­bles, fruit, wine and liquor (not con­sumed on the premises), ready-made gar­ments and fur­ni­ture, among oth­ers.

The Bri­tish 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 it glob­ally which could help it 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 Rs 801 crore and a loss of Rs 72 crore. In 2008, Tesco tied up with Tata's 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 a few 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 needed to be sourced from small en­ter­prises with a cap­i­tal in­vest­ment of up to $2 mil­lion; this was ear­lier $1 mil­lion. How­ever, global re­tail­ers need the per­mis­sion of state gov­ern­ments be­fore they can op­er­ate.

Ma­ha­rash­tra and Kar­nataka, where the JV firm would ini­tially start its op­er­a­tions in, are ruled by the Congress and have al­lowed in­vest­ments by for­eign re­tail­ers. The­o­ret­i­cally, the field would be open for Tesco to ven­ture into other Con­gress­ruled states. How­ever, the states ruled by the BJP are op­posed to al­low­ing global ma­jors in multi-brand re­tail.


Year 2011

2012 2013 2018

2023 To­tal re­tail in In­dia ($ bn)



Or­gan­ised re­tail (as % of to­tal re­tail)

6 490




8 13

24 Source: Technopak Anal­y­sis

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