Tesco Plc (TSCO), the U.K.’s largest supermarket company, plans to become the first global chain to enter India since the government allowed foreign companies to invest in multi-brand retail more than a year ago.
Tesco proposed to invest about $110 million to gain a 50 percent stake in partner Trent Hypermarket Ltd. (TRENT), a unit of Tata Group that runs Star Bazaar supermarkets, according to a statement from the commerce ministry. The application was submitted yesterday and they plan to open between three and five new stores each fiscal year, it said.
The Cheshunt, England-based retailer’s decision to invest in India gives it an edge over Wal-Mart Stores Inc. (WMT), which recently ended a six-year-old partnership with Bharti Retail, stalling the world’s biggest retailer’s efforts to expand in the country. Tesco’s move is likely to provide an impetus for other international retailers to enter a market that’s projected to be worth $865 billion by 2023, said Ankur Bisen, senior vice president for retail at consultant Technopak Advisors Pvt.
“Symbolically this is great news,” Bisen said in an interview from his Delhi office. “Everybody was doing a wait-and-watch to see who will take the plunge first, and this will send some sort of positive news in the retail space.”
Trent Ltd. rose as much as 19 percent to 1,265 rupees, headed for the steepest gain since November 2004. It traded at 9 percent higher at 12:18 p.m. in Mumbai trading. The benchmark S&P BSE Sensex (SENSEX) rose 1 percent.
While India changed laws in September last year to allow foreign retailers to own majority stakes in stores selling multiple brands, no companies had sought such licenses, partly because they considered the conditions onerous.
In August, the government eased some rules governing merchandise buying, infrastructure investment and store locations, to lure global chains to open stores in Asia’s third biggest economy.
Tesco’s application will be for the almost minimum amount required under’s India’s policy governing foreign investment in supermarkets, the commerce ministry said yesterday. Those rules require foreign entities to invest a minimum of $100 million, half of which has to be for facilities such as warehouses, distribution networks and refrigerated storage centers.
Foreign companies are required to have a local partner to run supermarket chains in India. Under recently relaxed rules, such joint ventures will have to buy 30 percent of manufactured products from small- and medium-sized local businesses with less than $2 million invested in factories and machinery.
Earlier rules were stricter, defining “small and medium-sized” companies as those with investments of less than $1 million.
Trent runs 16 Star Bazaar stores in four states, and the Tesco joint venture will operate stores only in two of those states of Maharashtra and Karnataka under banners including ‘Star Daily’ and Star Market’ with a brand ‘A Tata and Tesco Enterprise,’ the commerce ministry said. The other two states, Gujarat and Tamil Nadu, currently don’t allow foreign investment in supermarkets.
Tesco’s application lists that the stores will sell a range of products, including fresh food, apparel, jewellery and electronic equipment, according to the commerce ministry statement.
The initial investment “is not a lot of money” in the context of the retail market, Technopak’s Bisen said. “Tesco has been looking at India as a major sourcing hub and now they are looking at it as a market as well.”
Retailers selling single brands, such as Ikea and Hennes & Mauritz AB (HMB), can own stores outright in India without a local partner. Ikea, the Swedish home-furnishings chain, has said it plans to invest as much as 1.5 billion euros ($2.1 billion) to set up 25 stores in the country.