UK supermarket operator Tesco Plc. has finally announced a deal to open shop in India. That’s an important step for a retailer with global ambitions. The company needs to be in India’s $350 billion (about Rs15 trillion) market. But it’s a long-term game. More important for the next few years is Tesco’s quiet progress in countries such as Turkey.
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Tesco, the world’s third largest food retailer by revenues, announced on 12 August that it will start a wholesale cash-and-carry business in India. It will make an initial investment of up to £60 million (Rs485 crore) in the next two years. Tesco also said it was entering into an exclusive franchise agreement with Trent Ltd, the retail arm of the Tata group.
Under the terms of the agreement, for which Tesco will receive a fee, Trent will use Tesco’s experience to develop Star Bazaar, its hypermarket chain. Tesco’s wholesale business will supply Star Bazaar.
India’s retail market is valued at $350 billion and is forecast to double by 2015, according to Technopak Advisors Pvt. Ltd, an Indian retail consultancy.
Newer avenues: A Tesco store in Newcastle Upon Tyne, UK. Photograph: Mark Pinder / Bloomberg
Tesco opened its first store in Istanbul, Turkey, last week. The UK company’s revenues from Turkey grew 69% in the financial year ended February. Tesco’s Turkish retail chain Kipa will invest $1.5 billion over the next five years as it establishes 100 stores. Kipa has said it expects revenues to reach $5 billion once the new stores are operational. Tesco has opened 28 hypermarkets in Turkey and 57 Express stores in the last five years.
After opening in China and the US, moving into India completes a land grab for stakes in the world’s most desired retail markets bar Russia. It also ends a two-year waiting game. In 2006, Wal-Mart Stores Inc. frustratingly beat Tesco to a joint venture with Bharti Enterprises Ltd, the Indian conglomerate. By law, foreign retailers selling a range of brands must have a local partner in India.
But in classic Tesco fashion, it’s a cautious deal. Tesco will provide advice to the retail operations of Indian conglomerate Tata. It will also invest £60m by 2010 to open three cash-and-carry outlets. That’s a snip for a company with £51.8 billion of sales and pre-tax profits of £2.9 billion last year. Bharti plans to spend $2.5 billion by 2015 on stores of varying sizes.
India certainly has some mesmerising statistics. Its 1.1 billion population is second only to China and is expected to be bigger than China’s in 2025. The Indian retail market is predicted to double to $700 billion by 2015. But Tesco is wise to tread carefully.
The Indian retail market is still much smaller than the US market, where the retailer has suffered an uncertain start. India can be also a difficult place in which to operate. Infrastructure is often poor and Wal-Mart has encountered political opposition.
That said, Tesco needs new growth to offset flagging sales in its core British market. For the moment, China or Turkey are more important to help Tesco justify its forecast 14 times earnings for 2009. That’s well above a sector average of 12.7 times.
Tesco quietly opened a store in Istanbul last week, bringing its total in the country to around 90 in five years. It needs to emulate that success in India and elsewhere to keep up its momentum.