BackTesco forms JV with Trent for multi-brand retail in India
Tesco will invest around 85 million in the joint venture, which will operate 12 stores in the country
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Mumbai: British supermarket chain Tesco Plc has signed an agreement with Trent Ltd to form a 50:50 joint venture (JV) with the Tata group company, going ahead with the politically sensitive deal just three weeks before the start of India’s general election. The announcement follows approval of the proposal by the Foreign Investment Promotion Board in December.
“Tesco today entered into an agreement with Trent Ltd, part of the Tata group, to form a 50:50 joint venture in Trent Hypermarket Ltd (THL) which operates the Star Bazaar retail business in India. Tesco’s investment will be around £85 million (around ₹ 860 crore)," Tesco said in a statement to the London Stock Exchange. Completion of the transaction is subject to other approvals.
Tesco is the first global supermarket operator to decide on investing in India since the government in September 2012 allowed 51% foreign direct investment (FDI) in so-called multi-brand retail. A lack of policy clarity and political resistance to the policy change have hindered other store chains.
THL will operate 12 stores retailing a range of merchandise including food and groceries, personal and home care products, home products and kitchenware, fashionwear and accessories, among other things.
“We have been working with Tata in India for over five years, supporting the development of their Star Bazaar andStar Daily multi-brand retail stores via the provision of wholesale and franchise agreements," said a Tesco spokesperson. “We’re delighted to be taking this step, and look forward to working together to bring the best of our retail experience to the benefit of India’s consumers."
Under the agreement, Tesco Overseas Investments Ltd, a subsidiary of Tesco, will purchase a part of the equity shares currently held by Trent in THL for about ₹ 150 crore and will separately subscribe to additional THL equity shares for about ₹ 700 crore, Trent said in a statement to BSE.
On Friday, Trent shares closed at ₹ 995.65 on BSE, down 0.41%, while the benchmark Sensex edged up 0.06% to end at 21,753.75 points.
The announcement comes ahead of the nine-phase general election that starts on 7 April. The Bharatiya Janata Party (BJP), which has emerged the front runner in opinion polls leading up to the elections, is opposed to FDI in multi-brand retail.
Other parties, too, have resisted FDI in supermarket chains amid a perception that it would hurt small traders and neighbourhood grocery stores where most Indian households shop.
In 2012, the Trinamool Congress party quit the ruling United Progressive Alliance coalition 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.
The Union government has allowed states the discretion to decide whether or not they will allow FDI in multi-brand retail.
The JV between Trent and Tesco is only a logical extension of the first part of Tesco’s investment in the retail back end, said Arvind Singhal, chairman of Technopak Advisors Pvt. Ltd, a retail consulting firm.
According to Singhal, the venture would be operational in Karnataka and Maharashtra that have allowed FDI. It would not include stores in states such as Gujarat that don’t allow FDI.
Singhal is of the opinion that the BJP would not reverse an existing policy or create obstacles for existing stores if it were to come to power.
According to a January report by India Ratings and Research Pvt. Ltd, organized retail is set to grow 8-10% in 2014-15, down from an estimated 14% in 2012-13.
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.
“Now since they (Tesco) have put the money on the table and firmed their strategy, my sense is that things should move fast now," said Gaurav Gupta, a senior director at Deloitte.
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