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December 23, 2013

Comment: Investment boosts reputations of Tesco and New Delhi

It is, for both sides, an investment that can help improve their reputations. Tesco's plan to run multi-brand retail outlets in India demonstrates to the market the UK retailer, for all its problems, still has plans for growth. India's government will be happy that, 15 months after it pushed through plans to allow overseas players to invest in multi-brand retailers, someone has finally taken the bait.

By Dean Best

It is, for both sides, an investment that can help improve their reputations.

On Tuesday (17 December), Tesco set out a plan to become the first foreign retailer in India to run multi-brand outlets, with an application to invest in local operator Trent Hypermarket.

For Tesco, the move comes at the end of another challenging year for the UK retailer. Despite a GBP1bn investment plan, its domestic sales continue to be under pressure. Internationally, Tesco has this year quit the US, announced a face-saving plan for its business in China and seen sales in each of its other markets outside the UK fall.

The plan to take a 50% stake in Trent Hypermarket alongside Tata Group, Tesco’s partner in India since 2008, demonstrates to the market the UK retailer, for all its problems, still has plans for growth.

And the planned investment in India is, quite rightly, a cautious one. Tesco plans to help build the Star Bazaar chain in the states of Maharashtra and Karnataka with a reported investment of just US$110m.

There are two key reasons why CEO Philip Clarke is right to invest – but in a circumspect way. One, to demonstrate to Tesco shareholders the retailer will be watchful with its international expansion, not least after failed forays elsewhere. And, two, because, for all the country’s economic potential and for all the Indian government’s work to ease rules on foreign investment, it will not be easy building a multi-brand retail business in India, even with the new, relaxed regulations.

The fact the announcement stated Tesco plans to “build on the existing portfolio of Star Bazaar stores in Maharashtra and Karnataka” is telling. There are also Star Bazaar outlets in other states. Maharashtra and Karnataka are run by the Congress Party that pushed for openness; the other states are run by the BJP party that opposed the reform. Even after the rules were eased, power to allow overseas investment in multi-brand retail lies with the states, not the centre.

Neverthless, India’s government will be happy that, 15 months after it pushed through plans to allow overseas players to invest in multi-brand retailers, someone has finally taken the bait.

The ruling Congress Party faced intense political pressure from parts of its coalition and from opposition partners, who feared opening up the market would hit the jobs of thousands of local traders.

The new rules indicated a compromise with opponents, with investors having to meet a series of conditions, but that meant potential interested parties stayed away. This summer, the Indian government eased the rules further but that was not enough to entice any overseas retailer – until now. Reports in India have claimed the country’s government put pressure on Tesco to take the plunge.

Industry watchers and no doubt the Indian government are watching Wal-Mart’s intentions with interest.

Wal-Mart has decided to go it alone in India. It and former partner, the Indian conglomerate Bharti Enterprises, ended their venture this autumn. The US retail giant willl run their Best Price Modern Wholesale cash-and-carry outlets. However, it has put any expansion in India on hold until 2015. Wal-Mart wants to ensure its store opening plans meet local regulations, pertinent after the former Bharti Wal-Mart venture suspended employees while it investigated alleged violations of US bribery rules.

However, when the venture with Bharti ended, Wal-Mart indicated it believed India’s new rules on overseas investment in consumer-facing stores were not yet right.

“Walmart is committed to businesses that serve our members and provide good returns for our shareholders, and we will continue to advocate for investment conditions that allow FDI multi-brand retail in India,” it said.

Tesco has set out its stall to invest in India. It remains an open question how quickly its international retail peers will follow in 2014.

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