Tesco settles upon Tata as perfect partner for its passage into India
August 13, 2008 – 11:25 amIt has taken a decade of research, three years of talks with a succession of domestic operators and a very public break-up with Bharti Enterprises to get here, but retail major Tesco has, at last, found its Indian match.
Philip Clarke, fresh from a press conference in Mumbai, said it had been a “rollercoaster” of a day as he finally nailed a franchise deal to support Tata Group’s roll-out of its Star Bazaar hypermarket chain and announced plans for its own cash-and-carry stores.
“We have had India on watch for quite a while and in the last few years we have felt that the time is getting closer,” said Mr Clarke, Tesco’s international and IT chief. “That’s why it’s taken me so long and I’m very pleased to be here.”
Restrictive foreign direct investment rules in India allow overseas supermarket chains to operate as wholesalers but not as retailers. That means if Wal-Mart, Tesco or Carrefour wants to open a hypermarket, it has to find a franchise partner to own and operate that store.
Under the terms of yesterday’s Tesco-Tata tie-up, the British chain will spend £60m on three cash-and-carry outlets in Mumbai, Delhi and Bangalore over the next two years. Those Tesco-owned sites will supply goods to Tata’s retail stores and the British grocer will also offer up its retailing know-how in return for a fee.
Finding the right partner has proved a hurdle for Tesco, which suffered a big setback in 2006 when prospective partner Bharti Enterprises ditched it in favour of Wal-Mart.
“There are many reasons why the talks broke down,” said Mr Clarke. “I don’t think we have handed the advantage to Wal-Mart. Both Tesco and Wal-Mart are here and that is a good thing for the market. It would have been nice to be here before but I am pleased with what I have got.”
While the plans are far less ambitious than those laid down by Bharti and Wal-Mart, the deal does give Tesco a toehold in a market of infinite possibilities.
Estimates of the size of India’s retailing sector vary from $280bn (£146bn) to nearly $400bn, with the industry overwhelmingly dominated by 12m kiranas, or small family-owned stores. But modern retailing, which accounts for just 5 per cent of the market, is nevertheless on the rise and the international chains are clamouring to grab a piece of a fast-expanding sector.
Seizing on its head-start, Wal-Mart and Bharti have been working on plans to roll-out 15 cash-and-carry outlets by 2015. These jointly owned stores will supply Bharti’s retail chain. Rajan Bharti Mittal, managing director of Bharti Retail, said earlier this year that the company would invest $2.5bn over seven years in its retail chain, with ambitions to develop a $10bn-a-year chain by 2012.
The other global grocers are also building positions. Germany’s Metro Group has been in India for five years already, with two wholesale stores in Bangalore. France’s Carrefour, the world’s second-biggest grocer, has also signalled its intent and will open up to four cash-and-carry stores in 2009, although finding the right retail partner remains elusive.
On the domestic front, Reliance Industries, India’s largest conglomerate, has already rolled out more than 600 stores in less than two years, selling fresh produce and groceries. Another conglomerate, Aditya Birla, has 500 “More” stores.
India-based analysts said Tesco had secured one of the strongest partners available in India: Tata knows the local market, while Tesco is a very efficient supermarket operator. “The synergies are partly qualitative - temperamentally they are suited to each other,” said Arvind Singhal, chairman of Technopak, a research consultancy.
“Even when you look into the Tata retail business in India, it’s not about flamboyance and making plans of spending billions of pounds but it’s about being very steady. In fact, they’re the most profitable retailer in India.”
Mr Clarke, who will visit India every couple of months over the coming two years, says Tata was worth the wait. “Everyone’s so interested in how long it takes and haven’t you been slow and why didn’t you go faster?” he said yesterday. “Businesses that act in haste repent at leisure.”
source:http://www.ft.com/cms/s/0/b209ee26-68ce-11dd-a4e5-0000779fd18c.html