A deal to launch a wholesale cash-and-carry business in India ends years of speculation, but initial expectations are modest
Tesco ended years of speculation yesterday by signing a deal to launch a wholesale cash and carry business in India, but said that sales would initially be "modest".
The grocery giant is to open its first cash and carry outlet in Mumbai by the end of next year, but it will open further distribution hubs in Delhi and Bangalore that will deliver food and non-food products to 12 million small, owner-run stores, or kiranas, as well as other small retailers, restaurants, hoteliers and catering businesses. The fascia of the cash and carry has not yet been decided, but it will include the Tesco name.
Tesco is also entering into a deal with Trent, the retail arm of the Tata Group, to supply products, services and expertise to its hypermarket business, Star Bazaar, in the burgeoning Indian retail market, where sales could double to £370bn by 2015.
However, Philip Clarke, Tesco's international and IT director, stressed that the revenues Tesco delivers from India would be "fairly small initially", and declined to comment on profitability timeframe.
The deal sends a powerful signal about Tesco's global ambitions, and follows the collapse of negotiations with Bharti Enterprises in 2006.
Given that global retail rival Wal-Mart signed a deal with Bharti in late 2006, and the German retail and wholesale giant Metro Group already has a cash and carry business in India, Tesco's launch plans will ease concern that it might have been losing ground in India.
Under Indian foreign direct investment (FDI) regulations, multi-brand foreign retailers are not allowed to sell directly to consumers in retail stores, but they can run wholesale operations and provide infrastructure support services to local companies, as Tesco is doing with Tata.
While it is unclear if the Indian authorities have any short-term plans to relax the FDI regulations, industry experts expect it to eventually happen.
Mr Clarke said: "If and when it changes we will have a wholesale business and our association with Tata will give us great experience in India."
Mr Clarke said that Tesco had been plotting its entry into India for 10 years.
The Shore Capital analyst Darren Shirley said: "We view this as a sensible deal for Tesco, with a strong partner in Tata, which has existing retail capability and strong local knowledge of the Indian market, whilst it will enable Tesco to begin the development infrastructure and supply chain, which is one of the current constraints of the Indian market to modern retail practices."
Asked if he expected protests from kiranas, Mr Clarke said: "People will judge us not by what we say but what we do."
India has a growingpopulation of 1.1 billion, which is expected toovertake China by 2025.
Mr Clarke said that, of the cash and carry's products, up to 40 per cent will be non-food, such as electrical devices and cooking equipment, but sales volumes will be heavily weighted towards food.
Trent's Star Bazaar, which will be supplied by Tesco's cash and carrybusiness, has four hypermarkets and wants to ramp this up to 50 over the next five years, although Tesco will not feature on the fascia.
Tesco's overseas expansion
Tesco launched the Fresh & Easy convenience store chain in the US in November 2007. After sprucing up the stores and introducing more brands this summer, trade at Fresh & Easy is gathering momentum as it seeks to realise ambitions of up to 1,000 stores along the west coast from San Diego to Seattle. Tesco now operates 71 stores in Southern California, Arizona and Nevada.
The supermarket launched in China in 2004 and now has 56 stores in the country, of which the overwhelming majority are hypermarkets. In the year to end of February, Tesco said it delivered strong sales in China, including good like-for-like growth and a modest profit.
Tesco entered South Korea in 1999, but the scale of its ambitions in the country became clear in May when it acquired 36 Homever hypermarkets from the E-Land Group for £958m. Samsung Tesco now has more than 66 Homeplus hypermarkets and 72 Homeplus Express stores in South Korea.
The UK company now has operations in 12 countries (excluding India) outside Britain, which also include the Czech Republic, Hungary, Poland, Republic of Ireland, Slovakia, Turkey, Thailand, Malaysia and Japan. Given its strong position in the UK grocery market, Tesco expects its international division will deliver a large chunk of its sales growth over coming years.