UK's top retailer and the third-largest in the world, Tesco, is in the news not just for being the first international chain seeking to operate multi-brand stores in India after the government eased foreign investment norms last year. But the UK retailer's proposal in December to pick up 50 per cent stake in Tata group's Trent Hypermarket in a deal worth $110 million is significant also because of other reasons. For one, it has decided to enter a new territory when its recent policy has been to exit foreign shores. Then, it is venturing into a business where the conditions remain tough.
Prior to the news about the India entry, the biggest announcement from the £65-billion behemoth from England's Cheshunt last year was its sale of the US business, Fresh & Easy, to private equity firm Yucaipa Companies after losses soared to £1.2 billion. The exit happened in spite of Tesco's aggressive expansion plans in the US when it launched there in 2007. Tesco's sojourn in China, a paradise for retailers, hasn't been smooth either. A few months ago, the British supermarket chain lowered its stake in Tesco China by entering into a joint venture with China Resources Enterprise (CRE), and merging its 134 stores with the 2,986 held by CRE's Vanguard. The UK retailer's stake is now down to 20 per cent in the business. That's not all. In 2012, Tesco reduced its footprint in Japan as well by selling off 50 per cent of its stake to Japan's largest retailer, Aeon.
Apart from an overall downturn in the economy, what caused the sales to slide further was the controversy in which some of Tesco's burgers were revealed to contain horse meat. Tesco Chief Executive Philip Clarke has admitted that the horse meat scandal added to the company's woes in an already slow market.
While the supermarket chain is fighting back with a £1-billion pound turnaround plan that was launched in 2012 after Tesco's first profit warning in 20 years, the India plans are significant as the company had put all expansion on hold for the next three years.
India's confounding rules
Tesco will not find things easy in India. Concerns still remain over stringent conditions linked to multi-brand retail policy - the mandatory 30 per cent sourcing from India's small and medium sector and compulsory investment in greenfield facilities. The policy also limits foreign investment at 51 per cent, making it necessary for a foreign chain to forge alliance with Indian companies. Then, there is no change in the condition that state governments have to give the go ahead to foreign retailers to set up shop - at the moment, all non-Congress-led states are opposed to FDI in multi-brand retail. To add to this, a big shadow hangs over how the policy will pan out if a new party or coalition takes charge at the Centre after general elections a few months from now.
Saloni Nangia, president, Technopak Advisors, a retail consultancy, says Tesco's India initiative is a sign of confidence in the potential of the market. "Tesco could have looked at any other market, but it chose India," she says. Reuters, however, reported a few days ago that Tesco was under tremendous pressure from the Indian government to make an application. While Tesco has issued a statement saying its investment proposal was "based on business considerations" and "not any external pressure", there is no doubt the lack of response from foreign retailers and the constant dilly-dallying have left the government very upset.
Last year, a big shock to the government came from the world's largest retailer, US-based Walmart, when its Asia head Scott Price said that India's multi-brand retail policy was not conducive for international business to come to India. Walmart later broke off with Indian partner, Bharti, partly because of internal issues and also for what it called the government's "impractical" policy.
Once Walmart lost its Indian partner, Tesco, which already had a franchise tie-up with Tata's Trent for back-end logistics and cash-and-carry, was the only hope for the Indian government. France's Carrefour, the second largest retailer in the world, which is present in India with its cash-and-carry operations, is yet to find an Indian partner. In that sense, it's not a surprise that Tesco emerged as the first international entrant in multi-brand retail.
What was surprising though was the speed with which Tesco's application was vetted and cleared by the Department of Industrial Policy & Promotion (DIPP) and then by the Foreign Investment Promotion Board (FIPB). The application was submitted on December 17 . It was cleared by FIPB on December 30, though industry and experts had raised questions on whether the application complied with the government's policy on greenfield and brownfield investments. Tesco has stated that its application is in compliance with the policy.
|THE DEALMAKER: Noel Tata|
The 56-year-old did the groundwork for the deal in May last year when, as the non-executive vice-chairman of the company, he met Union Commerce Minister Anand Sharma along with Tesco Chief Executive Philip Clarke to seek clarity on the government's foreign investment policy in retail.
However, this isn't the first example of Tata's active engagement with Trent's future. As managing director, he was also the moving force behind Tesco's franchisee agreement with Trent in 2008.
Trent's franchisee agreement with Tesco was a coup of sorts for Tata, who is also the brother-in-law of Tata Sons Chairman Cyrus Mistry. The UK company was then in discussions with a dozen Indian retailers, including Bharti and DLF, but he got the retailer to plump for the Tatas. Tata had also acquired Landmark book and music store in 2005, beating many contenders, including Future Group founder Kishore Biyani, and inked a deal with Benetton to bring in its premium brand, Sisley, to India.
Credited with increasing Trent's turnover from Rs 8.2 crore in 1998-99 to Rs 1,137 crore in 2009-10, Tata currently is the non-executive vice-chairman of Trent. While he is also the managing director of Tatas’ trading arm Tata International, insiders say retail is the closest to his heart.
“Operationally, he is completely involved. He attends all board and strategy meetings. Though there are different chief executives for different formats, his perspective is considered very important,” says a senior company executive.
Slow clearances for others
Compare this with the experience of Swedish single-brand furniture retailer Ikea or even fashion chain H&M. Even as 100 per cent foreign investment is allowed in single-brand retail, both Ikea and H&M faced a volley of questions on their applications and it took the government several months to clear their proposals. In fact, Ikea, with the biggest investment plan in retail so far at Rs 10,500 crore, insisted that it was not possible to comply with the sourcing conditions in the Indian policy. After much jockeying, the policy was tweaked. Instead of a mandatory 30 per cent sourcing from Indian small and medium enterprises, single-brand chains were permitted a mandatory 30 per cent sourcing from Indian 'entities', "preferably" from small and medium enterprises. Ikea applied in June 2012 and its proposal got the final clearance only in early 2013. H&M's proposal came early 2013 and was cleared towards the end of the year.
However, some observers say the promptness with which Tesco's application was processed has to do with the government gaining in experience. "The Ikea and H&M proposals gave the government the opportunity to confirm its own understanding and interpretation of the policy too," says Diljeet Titus, a lawyer who has handled several retail FDI proposals, including that of Ikea and H&M.
Perhaps for this reason, Tesco is treading carefully. Its strategy to start operations in the traditionally safe markets of Karnataka and Maharashtra is being seen as smart. Both Karnataka and Maharashtra are Congress-ruled states, with no opposition to foreign retail. Trent already operates stores in these two states, making the road easier for Tesco.
Tesco, which has had a franchise agreement to provide support to Trent's Star Bazaar chain since 2008, is expected to open three or four stores a year under a slow expansion plan. Also, sources indicate that no new store may come up before the general elections slated for April-May 2014 . The joint venture will operate in India through a chain of stores under various banners, including Star Bazaar, Star Daily, Star Market, their tag line saying 'A Tata and Tesco Enterprise'.
"This is the first test of the policy and a positive sign for other retailers," says Pinakiranjan Mishra, partner and national leader (Retail & Consumer Products), EY.
While Tesco may be taking it slow with its brick and mortar expansion plans, if FDI is permitted in e-commerce, a step on which the government is working on, the company may pick up pace. Globally, Tesco has been aggressive in its online plans. So have other international players, such as Walmart, in an attempt to compete with the largest online retailer Amazon.
Meanwhile, the guessing game is on as to who will be next to enter India. It could be Carrefour, now believed to be in talks with Indian groups like Kishore Biyani-led Future and Shoppers Stop-owned Hypercity, or another French chain, Auchan, which could convert its current franchise pact with Landmark group into a joint venture. Japanese player Aeon is also exploring the India market, while Walmart is watching the moves before it jumps into the fray. But that may take at least another year.