French retailer Auchan has become the latest major name in the sector to plant a flag in India.

The privately-held company, which has stores in the Middle East, China and Russia, has struck a franchise deal with Dubai-based Landmark Group, Spar International’s former partner in India.

Landmark operates in India through its Max Hypermarket chain. It and Spar agreed to end their five-year partnership earlier this year.

This week, a long-rumoured deal with Auchan was announced. Landmark said it had been in talks with a number of partners to expand its business in India but Viney Singh, MD of Max Hypermarket, told just-food the retailer had “found the right fit” in Auchan. For its part, the French retailer said teaming up with the “reliable and knowledgeable” Max Hypermarket was a “great way” to follow its global rivals into India’s high-potential but still challenging retail sector.

Landmark’s 13 Max Hypermarket stores will be rebranded as Auchan and the two new partners plan to open 12-15 outlets a year, building a store network throughout India.

“Max Hypermarket already has a presence in south, north and western India. The intention is to build on this and have a national footprint,” an Auchan spokesperson said.

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India’s restrictions on foreign investment in the retail sector, designed to protect the mom-and-pop stores that account for over 90% of sales in the country, prevent overseas investors owning multi-brand outlets. However, franchise deals are one way for multinational retailers to grab a slice of India’s fast-growing retail sector – and prepare for when (and analysts believe it is a case of when, not if, despite last year’s government U-turn), regulations on foreign ownership are eased.

“What it gives Auchan is a ready-made store infrastructure and a team that has had some traction and experience on the ground. Getting into an existing operation helps them get learnings about India much faster. From a long-term stand-point, that might be handy for a group that is coming into India. It helps to have a head-start,” Kaushika Madhavan, a Mumbai-based partner at global retail consultants A.T. Kearney, tells just-food.

Auchan has not followed its international peers in investing in India’s cash-and-carry sector. India’s foreign investment rules allow multinational retailers to help run cash-and-carries and the likes of Wal-Mart Stores, Carrefour and Metro Group have entered India this way.

Which type of investment is most effective? Madhavan says it is “hard to call”. He says: “Cash and carry helps organisations get a very good understanding of the operating realities in India and establish supplier relationships. The disadvantage is organisations have to invest much more money, time and resources. Franchising is a lighter touch. Working with a local partner, however, limits the organizations from getting the on-the-ground experience that running cash and carry operations provide. Both have pros and cons.”

Hypermarkets are seen as one of the more successful modern store formats operating in an Indian market where, although urbanisation is taking hold, incomes are rising and Western-style consumption habits are gaining favour, sales are still dominated by mom-and-pop or kirana stores. Local players including Pantaloon Retail, Aditya Birla and Reliance Retail have built a steadily increasing network of hypermarkets, although, in absolute terms, the outlets number in the hundreds, dwarfed by the millions of kirana outlets.

However, Madhavan argues the “modern” retail trade is expanding rapidly and says the better margin hypermarket operators can achieve mark the format out as one of the most attractive.

“The relative performance of hypermarkets seems to have been better in India. For the supermarkets to differentiate substantially from mom-and-pop stores has been a challenge. Because hypermarkets have a substantially wider range of products, it added an attraction for customers to go and visit them,” Madhavan says.

Investors in India have long complained about the country’s under-developed supply chain. Proponents of greater foreign investment in the local retail sector argue multinationals can help improve logistics and reduce waste, a factor in India’s relatively high inflation. Combine these challenges with India’s regulations on prices and, Madhavan argues, smaller stores can see their margins eroded. 

“In India, we have a maximum retail price regime. There is not much price flexibility on FMCG products. If you see convenience stores in developed markets, they charge a price premium. Having a maximum retail price regime means that is not allowed in India,” Madhavan says, “In fresh food, the lack of supply chain maturity leads to substantial losses. Hence the margin profile of supermarkets – because of the maximum retail price regime, losses in fresh food – are not very attractive. This, in combination with high rents in India, makes the profit profile of small formats low. Hypermarkets, because of larger sizes and having high-margin product assortment, are able to have a better overall performance profile,” he says.

Announcing the deal, Auchan talked of the “great opportunity” of operating in a “high potential market” with “strong economic growth”. The growth of India’s middle class, the country’s rapid urbanisation and demand for Western-style goods mean that, despite the challenges in supply chain and distribution, the market is seen as one of the more attractive places for multinational retailers to invest.

However, it is not just the world’s largest retailers that are eyeing India’s growth. Domestic players have been busy expanding, too. Auchan and Landmark have set a clear target for expansion. With competition fierce, are their plans too ambitious?

Anil Talreja, a partner at Deloitte Haskins & Sells in Mumbai, says multinational retailers face competition from Indian retailers but insists there is room for a number of retailers to expand – if they have the resources.

“There is a lot of domestic competition. There is a lot of challenge to global players. It’s not a cakewalk [but] there is significant opportunity in India. The consumption potential of the country is massive, to say the least. In terms of expansion capacity, if a company has the resources, they can easily do it,” Talreja says.

Madhavan sees opportunity for Auchan. “Other players are opening at that rate. It doesn’t look out of the realms of feasibility. Indian consumers are experimenting, they are trying out new formats.”

Auchan will no doubt be hoping India’s potential yields returns.