Walmart chickens out but Tesco makes leap of faith with Tata Trent

Shares in India’s Trent surged 8 percent in opening trade after retail giant  Tesco said on Tuesday it had applied to buy a 50 percent stake in the company’s unit, Trent Hypermarket Ltd.

The world’s third-largest retailer, which already has a franchise agreement to provide support to Trent’s Star Bazaar chain, has made an application to India’s Foreign Investment Promotion Board and plans to invest $110 million ( Rs 680 crore). Under rules framed in September last year when the UPA government decided to allow FDI in multi-brand retail, foreign investors were required to invest at least $100 million in the retailing venture.

Trent Hypermarket runs a discount hypermarket format under the brand name Star Bazaar. Currently there are 15 Star Bazaar stores in the country: three in Mumbai, four in Bangalore, two in Ahmedabad and Pune, one each in Aurangabad, Surat, Chennai and Kolhapur.

For Tesco, the deal is an extension of existing relation with Tatas in the retail sector. It is already a wholesale supplier of merchandise to Star Bazaar. Welcoming Tesco’s India plans, Commerce Minister Anand Sharma said Tesco’s India investment will help transform India’s retail sector.

“A marquee name like Tesco would mean an endorsement for destination India,” Arvind Singhal, chairman of retail consultancy Technopak Advisors, was quoted as saying by the Business Standard.

Reuters

Here is all you need to know about the deal:

1. Tesco will become the first foreign chain to invest in supermarkets in India since FDI was allowed in the retail space last year. It would even steal a march over global rival Walmart which split up with Bharti Enterprises two months ago.

2.The retailer has applied to India’s Foreign Investment Promotion Board for permission for an initial $110 million investment in the Tata Group’s retail business Trent Hypermarket Limited.Tesco has proposed an equal joint venture with its existing partner, Trent, a Tata group company, to open stores initially in Maharashtra and Karnataka. So basically, the proposed partnership will operate and build on the existing portfolio of Star Bazaar stores in Maharashtra and Karnataka only, as the other two states where Star Bazzar is present— Gujarat and Tamil Nadu— have banned foreign investment in retail.

3. The UK-based retailer will trade in products under 14 categories, including cereals, tea, coffee, spices, flour, vegetables and fruits, meat, fish and poultry, sweetmeat, bakery and dairy products, soft drinks, ice-creams, wine and liquor, textiles, footwear, crockery, furniture and electronic equipment among others and plans to open three to five stores every financial year.

4. The current market capitalisation of Trent stands at Rs 3,825.28 crore. The company has reported standalone sales of Rs 280.14 crore and a net profit of Rs 15.6 crore for the quarter ended September 2013. Currently Trent Hypermarket has a franchise and a wholesale supply arrangement with Tesco and its wholly-owned Indian subsidiary, Tesco Hindustan Wholesaling Pvt Limited, respectively. The exclusive franchise agreement grants Star Bazaar access to Tesco’s retail expertise and technical capability.  Trent at present operates Westside, a fast growing chain of retail stores. The company has 74 Westside departmental stores.

5. Trent vice-chairman Noel Tata said: “The application is a positive step forward in the relationship between the Tata group and Tesco. We believe that our understanding of the Indian market coupled with Tesco’s unparalleled global retail expertise will allow us to leverage the tremendous potential of the market to the benefit of all stakeholders.”

6.Tesco has stores in countries such as China, South Korea, Thailand, Malaysia, Poland, Hungary, Ireland, Slovakia, Czech Republic and Turkey. Tesco was formed in 1919 by a Polish emigrant Jack Cohen who started selling groceries from a stall in Hackney in London’s East End.

7. In September last year, the government had allowed 51 percent FDI in the sector with certain riders like mandatory sourcing from Indian SMEs and investment in back-end infrastructure. Due to the conditions, global retailers, including US-based Walmart and Tesco had refrained from sending formal proposals to the government. Following its meetings with both domestic and international retailers, the government in August 2013 eased the norms to make the segment lucrative for retailers.

Retrieved from: http://www.firstpost.com/business/walmart-chickens-out-but-tesco-makes-leap-of-faith-with-tata-trent-1293267.html?utm_source=ref_article

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India expansion on for global cash & carry chains

General sentiment that slowdown and dip in investor sentiment won’t affect rationale for expansion.

International cash and carry chains in the retail sector want to expand through the year in India, despite the economic slowdown and dip in foreign investor confidence.

Having no foreign direct investment (FDI) restriction, these wholesale chains are allowed to sell products only to retailers, professional users, caterers, institutional buyers and other businesses, which need special licences to buy from these outlets.

Walmart, the $446-billion American retail giant, which operates cash and carry outlets in India in a 50-50 joint venture with the Bharti group, expects to open 12 to 15 wholesale outlets in 2012, against 10 in 2011. At an average cost of $6-7 million (Rs 33-38 crore) per store, excluding land and construction cost, 15 outlets would mean an investment of anything between Rs 500 crore and Rs 600 crore. With land and construction cost, total investment could double.

CASH & CARRY INDIA MAP
Company Outlets opened
till May 2012
Total
 outlets 
Booker  2 4
Bharti-Walmart 2 17
Metro 2 11
Carrefour 0 2
Source: Companies

 

Even as Walmart has been waiting for the government to allow FDI in multi-brand retail, it is bullish on the India market for cash and carry outlets. It has opened two more in India this year and has a total of 17 till now.

Metro, the top German cash and carry group, which has an estimated annual revenue of euro 67 billion, is also planning to stay on the expansion path this year in India. While noting the challenging general economic conditions, a company spokesperson said, “Allocation of capex funds is to be prioritised more strongly.”

He said the Metro group had decided, therefore, “to first concentrate on like-for-like (existing stores) sales growth and to accelerate the expansion in selected countries, where we are already well established with our business model”. India is among the select countries where the German chain wants to continue to expand. As against three store launches in 2011, Metro has opened two (New Delhi and Jaipur) in the first five months of 2012. At around Rs 60-70 crore investment on each wholesale centre, a Metro spokesperson said many more outlets would be opened across the country over the next few years, but did not elaborate on the specifics.

French retail major Carrefour (annual sales worth euro 112 billion), which had launched one cash and carry outlet each in 2010 and 2011, may go for another store opening later this year, sector sources said. The company did not talk about its India plans. Carrefour, like Walmart, wants to set up operations in multi-brand retail in India and is waiting for the government to give a green signal. Its India head, Jean Noel Bironneau, had met commerce and industry minister Anand Sharma a few days before, perhaps to discuss issues related to multi-brand FDI.

UK-based Booker, a $6.5-billion cash and carry chain, has in the first five months of 2012 already surpassed last year’s store launch. This calendar year, it has opened two wholesale centres, with more planned, against just one in 2011. Zunaid Bangee, chief executive officer, Booker India, said the general global and European economic climate had not impacted the store opening plans. When asked if the company’s investment decisions would be influenced by the dip in global investor confidence in India at this point, Bangee replied, “No, this will not have an impact on our expansion plans.” The company plans to open up to 20 stores in India over the next five years. Its first outlet opened in Mumbai in 2009 and it has a total of four wholesale centres in the country.

Walmart, which had opened its first wholesale store in India in 2009, along with Bharti, dismisses the view that the global economic climate could influence its store expansion plans. “Saving people money so they can live better is at the heart of everything we do,” the spokesperson said, adding, “this is especially relevant in an economic slowdown”.

On global investors’ mood, a Bharti-Walmart spokesperson said, “The India story remains strong with the international business community.” Adding, “There is understanding and appreciation of the factors that impact policy making, particularly in India’s vibrant democracy.” Walmart is here in India for the long term, the executive added.

The Metro executive expressed similar sentiments. “We are confident in the big potential of the India market. We are on a growth path and well positioned to expand our presence in other parts of the country,” he said. The oldest international cash and carry chain in India, it opened its first outlet in the country some eight years before. Having picked up speed recently, it has a total of 11 wholesale outlets in India till now. Apart from India, Metro has launched two outlets, in both China and Kazakhstan, and one each in Poland, Russia and Vietnam this calendar year till April. “We will continue to grow in our existing markets, with a focus on Eastern Europe and Asia,” the executive said.

Cash-and-carry represents an opportunity worth around $150 billion (Rs 8.25 lakh crore) of the $500-billion (Rs 27.5 lakh crore) annual retail business in India.

Retrieved from – http://www.business-standard.com/india/news/india-expansionfor-global-cashcarry-chains/475544/