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Tesco is just dipping its toes in the water with India investment

posted: 19 December, 2013

In this week’s media you’d be hard-pressed not have noticed Tesco’s intention to open multi-brand stores in India. While Tesco’s own announcement was a little less bombastic, it does indicate an interesting change of direction.

Tesco has been established in India since 2008 when they formed a joint-venture with the Tata group to provide back-end and wholesale support. They now supply around 80% of the goods to Tata’s Star Bazaar hypermarket and Star Daily convenience stores. So what’s changed?

A little background… last year the Indian Government relaxed rules on foreign direct investment (FDI) in retail, meaning – at least in theory – that multi-brand retailers such as Tesco could now step out of the shadows and take centre stage as the first global supermarket to enter India. Can Tesco succeed where Wal-Mart previously failed? RMC’s Joseph Leftwich comments for Retail Week

 “Tesco has become the first global retailer to try to enter India since it allowed foreign investment in multi-brand retail last year.

A brave move, you might think, considering the string of notable set-backs the retailer has experienced this year.

But just how bold a move is it?

Tesco has been operating in India long enough to know that it’s inconceivable their application would be green-lighted, unchanged on-the-nod without a procession of middle-men, politicians, and concerned third-parties having their say.

They know that the final deal – should there be one – may bear only passing resemblance to their original application. They also know that it may take a year at the very least to be processed, and even then, they will be under no obligation to rush in.

So commercially speaking, I think Tesco is just dipping its toes.

Also consider what Tesco is willing to put into this venture – around €80m.

Sounds like a fair whack, but compare this to IKEA which, in its application to India’s Department of Industrial Policy and Promotion, pledged to invest around €1.5bn – €600m towards opening an initial 10 stores, then €900m to open 15 more stores at a later stage.

Obviously, the two companies aren’t comparable. Tesco has an amount of technical experience in the country as well as a rather handy local partner in Tata, neither of which Ikea has. But the shortfall between the two plans is nonetheless striking.

Of course, I haven’t seen the application, but you do wonder how far €80m will get them in India and whether it’s anywhere near enough.

Does it sound like a high-stakes play? I have to say I’m unconvinced.

There is definitely good presentational value for Tesco in all of this, however. They get to play the part of doughty pioneers committed to offering value to shoppers in a faraway land. This is all grist to the mill for a company which hasn’t had its problems to seek this year.

But in reality, theirs is a modest investment pledged without commitment on a very elastic timescale.

Brave? Not exactly. Not yet, anyway. But they will need to be brave if they are to tackle India and win.”

Original article published by Retail Week on 18/12/2013