December 19, 2013
took months of arm-twisting and assurances from New Delhi to persuade
British retailer Tesco Plc to take the plunge and become the first
foreign player to set up a chain of supermarkets in India.
Earlier this year, world No.1, Wal-Mart Stores Inc, walked away
from India and few expected any of its rivals to step in before
elections due by next May, which could bring to power a government
that reverses the opening up of a $500 billion market long dominated
by millions of mom-and-pop shops.
But on Tuesday, Tesco announced that it had applied to buy a
50 percent stake in Tata Group's Trent Hypermarket Ltd to open
stores in the western state of Maharashtra and neighbouring Karnataka,
The decision marked a victory for the ruling Congress party in
securing its first foreign investment victory after staking its
political survival on reforming the supermarket sector.
"We were under phenomenal pressure from the Indian government
to apply and frankly phenomenal pressure is an understatement,"
said a senior Tesco official, who spoke on condition of anonymity.
"The pressure was intense on a government-to-government level."
A Tesco spokesperson did not comment on the reasons behind the
company's decision to enter India now.
"We've always said we'd like to get more involved in this
exciting market and having learnt a great deal through our agreement
with Tata, we have taken the decision to make an application to
develop a multi-brand retail business in India."
Tesco is in the middle of a big investment drive to reinvigorate
its sales in the UK and despite closing loss-making businesses
in Japan and the United States, its move to enter India shows
the retailer's continued ambitions to expand abroad.
Tesco, the world's third-largest retailer, and Wal-Mart lobbied
the Indian government for years to allow global brands into the
The door finally opened at the end of 2012 when the government,
desperate to attract foreign investment as economic growth fell
to its slowest pace in a decade, overrode stiff opposition from
coalition allies and opposition parties.
But the government's plans were dealt a heavy blow in October
when Wal-Mart called off its Indian wholesale joint venture and
postponed its entry plans, blaming unfriendly regulations and
Sources at Tesco and Trent said they took a calculated risk by
making their application before the elections, but it was a cautious
one, deciding to invest only $100 million for now.
"Instead of waiting for another year we said 'let's go for
it now'," said an official at Trent, who cannot be named
as he is not authorised to speak to the media.
"We have been made to understand...that an approved investment
plan will not be reversed as it will send a very wrong message
to the international investor community."
Company sources said there had been numerous meetings with the
government throughout the year, and talks intensified in recent
Two government sources said trade minister Anand Sharma met Tesco
chairman Richard Broadbent at the Davos World Economic Forum in
January and assured him there of "hand-holding" by the
government if the company invested in India.
Sharma also had several meetings with Tesco chief executive Philip
Clarke, who sought dilutions to the entry requirements.
WAY AROUND REGULATIONS
Along with Wal-Mart and Carrefour, Tesco until recently maintained
that India's retail regulations, especially one that mandates
30 percent local sourcing from small and medium-sized enterprises,
will be difficult to comply with.
But the small scale of Trent's hypermarket business will help
Tesco adhere to the regulations for now, sources said.
"We have decided to tweak our current business model to
comply with this," said the Tesco official. "Make no
mistake, it's going to be tough and the challenge will keep increasing
as we grow, and so, as you see, our immediate growth plans for
India are not very aggressive."
Since 2008, Tesco has had a franchise agreement with Trent Hypermarkets,
which runs the Star Bazaar chain of stores and provides sourcing
and technical help to its partner.
Star Bazaar runs 16 stores in the country and if Tesco's investment
is approved, they will open only 3-4 stores a year under the partnership,
a very slow expansion plan designed to meet the sourcing regulations,
find a model that works and fix the loss-making hypermarket chain,
retail consultants said.
Tesco's investment in India is widely expected to be cleared
without much political opposition, thanks to its decision to keep
a low profile before, consultants said. Wal-Mart, by contrast,
had blazed the Indian retail trail, earning the ire of political
parties and trade unions. An investigation into whether it broke
India's foreign investment rules and an internal bribery probe
also delayed its plans.
"Wal-Mart decided to be aggressive, but Tesco decided
to be discreet and its worked well for them," said Devangshu
Dutta who heads retail consultancy Third Eyesight. "But whether
they will be able to make use of the first-mover advantage and
eventually lead the race remains to be seen."
(Additional reporting by Manoj Kumar in NEW DELHI and James
Davey in LONDON; Editing by John Chalmers, Matt Driskill and Mark
(Sourced from Reuters.)