Blog: Dean BestEmerging markets tempt Tesco; when will Heinz nibble?

Dean Best | 18 August 2008

The highly-anticipated news that Tesco is entering the Indian retail sector came last week, when it emerged that after three years of searching the UK retailer finally found its ideal match in local partner Tata Group.

“We’ve spent a long time looking for the right partner, and we believe that we have found it in Tata,” a spokesperson for Tesco told just-food on Tuesday (12 August).

Tesco has entered into an agreement with Trent, the retail arm of Tata, which will see it provide backroom support for the expansion of the Star Bazaar hypermarket chain.

Tesco has taken a double-pronged approach to its assault on Indian retailing. It will also open its own wholesale cash-and-carry business to provide a range of fresh food, grocery and non-food products to small retailers, restaurants, kirana stores and other business owners.

The potential offered by the US$202.6bn Indian food retail sector is huge, making it a tempting prize for international corporations. However, the country’s stringent rules on foreign direct investment (FDI) have barred multinationals from entering in a manner of their choosing.

It is likely that Tesco would have preferred to debut in India by starting up or acquiring a consumer retailer and it is no secret that the group hopes to establish a consumer retailing business in India if and when the country’s rules on FDI change.

This deal represents the next best option. It provides a platform for future growth, an opportunity to learn about the market and enables it to establish a supply chain in the country. By entering the wholesale market and forming links with Tata, Tesco is setting the stage for future growth.

In other news, Heinz CEO William Johnson created some waves last week when he revealed that the US ketchup giant is targeting a 6% increase in sales over the next two years. This, Johnson said, would drive operating income growth of 6-7% and EPS growth of 8-11%.

Addressing investors at Wednesday’s AGM, Johnson unveiled Heinz’s two-year growth plan. The company said that emerging markets were going to become increasingly important to fuel growth, while innovation in the health and wellness category would drive sales gains in developed markets.

Johnson also said that the company has built up a sizeable war chest to fund value-added acquisitions in both developed and emerging markets. In particular, Johnson’s hint that Heinz would be interested in buying Campbell Soup Co. created quite a stir.

While Campbell’s products would fit neatly in Heinz’s portfolio and a merger of the two companies would allow the group to leverage economies of scale, it remains to be seen whether Heinz is seriously considering making a move on Campbell. Regardless of whether this particular deal materialises, with a bullish outlook and a sizeable acquisition fund, we can expect to see considerable acquisitive activity coming out of Pittsburgh in the months to come.


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