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Trent, Tesco bullish on expansion despite policy uncertainty

LiveMint logoLiveMint 21-05-2014 Sapna Agarwal

Mumbai: British retailer Tesco Plc. and Trent Ltd, the Tata group company with which it has formed a 50:50 joint venture (JV), are going ahead with ambitious expansion plans in Maharashtra and Karnataka, disregarding the incoming Indian administration’s opposition to foreign direct investment (FDI) in supermarkets.

Both the Maharashtra and Karnataka governments are supportive of FDI in so-called multi-brand retail, or the sale of multiple products and brands through one outlet, which the Congress-led United Progressive Alliance (UPA) government allowed in September 2012.

The Bharatiya Janata Party, which defeated the Congress in the April-May general election and is set to be installed in government on 26 May, opposed FDI in retail in its electoral manifesto.

Tesco and Trent in March signed an agreement to form an equal JV in Trent Hypermarket Ltd, which operates the Star Bazaar retail business in India, with the UK retailer committing an investment of £85 million. The agreement was signed three weeks before the start of India’s nine-phase election.

“We have a large pipeline of to-be-launched stores: The existing 12 Star Bazaar stores will continue and we intend to open at least five new stores every year, in Maharashtra and Karnataka,” Trent chairman Noel Tata said in the April edition of Tata Review, the group’s internal publication.

Tesco is the first global supermarket operator to decide on investing in India since the government allowed 51% FDI in multi-brand retail while leaving it to the state governments to decide whether or not they would allow such chain stores.

The Tata group sees a potentially lucrative opportunity in the supermarket business.

“Star Bazaar’s association with Tesco underlines the solid foundations of the business, and is a signal of the untapped opportunity in the Indian market. The operations and profitability of the business continue to improve, and the team is performing well on our targets,” Noel Tata said.

Trent Hypermarkets is also evaluating other formats. In October, the alliance opened a convenience store called Star Daily in Pune. “That (Star Daily) is doing very well. We plan to launch a second such store shortly. We believe that these mid-sized formats will reach profitability faster. It’s an exciting time for the business,” said Tata. A lack of policy clarity and political resistance to FDI in supermarkets, which critics say would hurt small traders, have hindered other store chains.

In 2012, the Trinamool Congress party quit the UPA to protest the policy change. The Aam Aadmi Party’s short-lived Delhi government wrote to the department of industrial policy and promotion in January opposing FDI in supermarket chains.

US-based Wal-Mart Stores Inc., the world’s biggest retailer, has decided to open 50 wholesale stores in four to five years and establish an e-commerce platform in India, as it seeks to sidestep political opposition. French retailer Carrefour Wholesale Cash and Carry India Pvt. Ltd has started to work on an exit plan after talks to sell its five wholesale stores to Sunil Mittal’s Bharti Group, The Times of India reported on 3 May.

“With the current government declaring that they are open to FDI except in retail, it is unlikely we will see much action from the foreign players in this sector soon,” said Rachna Nath, executive director and leader at PricewaterhouseCoopers India.

The fledgeling organized retail business in India has also been hurt by an economic downturn that has dampened consumer spending. India’s retail market is estimated to be worth $400 billion, of which the organized retail market is just 9-10%, according to Deloitte Touche Tohmatsu India Pvt. Ltd, a consulting firm.

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