Tesco has unveiled plans to enter the Indian retail market by establishing a wholesale business in Mumbai. The UK-retailer has also inked a deal to help expand Tata Group's hypermarket chain Star Bazaar. While Tesco's level of investment remains relatively small, the move clearly sets the stage for future expansion into India's burgeoning organised retail sector. Katy Humphries reports.

Tesco has made no secret of its desire to enter the Indian retail sector, which has long been viewed as a goldmine for international retailers. Over the past three years, there have been rumours abound that the UK's number one supermarket operator is preparing to debut on the Indian retail scene.

The long-awaited announcement came today (12 August), when Tesco said that it would invest GBP60m (US$115m) over the next two years to set up a wholesale cash-and-carry business in the market.

Tesco will initially establish one wholesale outlet in Mumbai, where it will supply products to the area's kirana stores, restaurants and small food outlets.

"We are currently looking at opening one cash-and-carry in Mumbai by the end of next year…. We haven't put a number on how many more we are aiming to open yet," a Tesco spokesperson tells just-food.

Looking to further expansion of its cash-and-carry operations, Tesco is mulling two more distribution hubs in Delhi and Bangalore that could support a network of smaller cash-and-carry stores throughout India.

Tesco has also entered into an agreement to supply goods, advise and technical support to the Star Bazaar hypermarket chain, which is owned by the Tata Group, the retail arm of Indian conglomerate Trent Group.

Trent's managing director Noel Tata said that Star Bazaar would lean on Tesco's retail experience during its five-year drive to increase the number of hypermarkets it operates from four to 50.

"Our ability to access Tesco's retail knowledge and expertise will play an important role in our endeavour to offer a unique shopping experience to customers across the country," he said.

According to Verdict Research analyst Luke Gladding, Tesco's decision to work with Tata is a wise move as the group's interests span a number of industries, including chemicals, hotels, telecoms and tea.

"Tata is a huge company with many interests throughout Indian industry. They are a good partner," Gladding comments.

However, in Gladding's view, Tesco is not entering India in a manner of its choosing.

Tesco has been prevented from opening its own brand of supermarkets in the country by stringent rules governing foreign investment. India's Foreign Direct Investment (FDI) legislation states that international multi-format chains may only own cash-and-carry businesses or work with a local partner in consumer retail through a franchise arrangement.

"By choice they would have wanted to buy a hypermarket chain or establish start-up operations similar to those in other markets…. This represents a compromise; the next best option. It gives Tesco a foothold, a base to learn from," Gladding tells just-food.

Indeed, during a conference call this morning Tesco international and IT director Philip Clarke spoke of the company's desire to operate its own consumer retail business should FDI regulations change.

"If and when it changes, our wholesale business and the agreement with the Tata Group gives us great experience of the Indian marketplace and consumer," Clarke says.

While Tesco already has dealings with Indian farmers and manufacturers who supply GBP170m of goods to the group's international businesses, moving into India allows the retailer to solidify these relationships.

Tesco has indicated that the majority of products sold through its wholesale business will be made in India, meaning that it will be able to forge further ties to Indian suppliers and gain a deeper understanding of the Indian supply chain. 

Through its partnership with Tata and the establishment of a wholesale enterprise, Tesco believes that it is creating a foundation that will enable it to expand quickly into the consumer retail sector, should the opportunity arise.

"This is something we would very much like to do and our entry into the market now would set us on good stead were the FDI regulations to change," Tesco tells just-food.

It has been predicted that India's US$350bn retail sector will double in size by 2015, and with only 5% of sales currently in the hands of modern retailers the market is a tempting prize for international players.

Tesco is not the only multinational preparing for a time when FDI regulations liberalise. Germany's Metro already operates a cash-and-carry chain in India while last year Wal-Mart formed a retail partnership with Bharti Enterprises. France's Carrefour has also said that it intends to enter the market and is currently seeking a local ally.

Nevertheless, it is far from certain that the Indian government will open up the consumer retail sector to foreign investment in the near future, as the issue remains a political hot potato. A recent government-backed proposal to liberalise rules on overseas investment in retailing has been stalled by resistance from the country's powerful left-wing political groups. 

For this reason, Tesco's investment in India remains relatively small.

"It is a very small deal in the grand scheme of things," Seymour Pierce analyst Freddie George tells just-food. "They have linked with a strong partner and it is the right sort of market to be entering. It is clearly the first stage of their expansion plans."

It therefore seems likely that Tesco will embark on a slow and steady expansion drive in the country, biding its time until it gains access to the consumer retail sector.