Monday, December 23, 2013

The first one to test the waters

In the month of September 2012, present Government of India, put everything at stake, including its own existence, to get its policy of Foreign direct investment in multi-brand retail trading approved by a reluctant and largely hostile parliament. The Government somehow scraped through the bill with only 12 states and union territories having agreeing to allow FDI funded multi-brand stores in their geographical boundaries after the sector was opened to foreign investment.

Government, while promoting the idea, had told everyone that these new retail stores would be a new distribution channel independent of the middle men and would stabilize the markets and would bring down the inflation. But then came the anti-climax. There were just no takers for the scheme, even till this very month. Initially, Government hoped that Walmart Stores, the world's largest retailer, which has been lobbying for years for India to open the sector and had already taken some steps in this direction, would come in first. However this did not happen as an internal probe was being done in the company to check if the India unit has in any way violated the US anti-graft laws. Walmart's India plans still remain in disarray with no clear time table for India entry. The major French retailer Carrefour still does not have a local partner to fit within framework for the policy.

The third major international player in multi- brand retail trading is British owned TESCO. As late as April 2013, TESCO had said that India's modern retail market was in "very early stage" with only £3 billion of potential business. This was followed by another analysis just 2 months back, where this retailer had placed India among its lowest preferred investment destinations along with China and Turkey. But during last two months, TESCO has suddenly changed its outlook for India and on 19th December 2013, actually announced that it has applied to the Government for a $110-million proposal, to invest in India in partnership with the TATA group, one of India's biggest business conglomerate with interests ranging from Automobiles, steel, telecommunications and consumer goods.

Analysts are attributing two reasons for this sudden change of heart for the company. There is one school of thinking, which feels that TESCO was arm-twisted by the Indian government to rush through with the application. According to Reuters, a TESCO official is believed to have said: "We were under phenomenal pressure from the Indian government to apply and frankly phenomenal pressure is an understatement. The pressure was intense on a government-to-government level."

According to another theory, TATA's may have prodded TESCO to decide on India favourably. Tatas may have advised TESCO in favour of India entry, arguing that in the current scenario, the government would go out of its way to see the proposal through. TATA group already has serious business interests in Britain like owning tea firm Tetley, steel maker Corus and luxury car brands Jaguar and Land Rover. It therefore certainly makes business sense for TATA's to form a joint venture with a British company to expand it's multi- brand retail business in India being done presently under brand name “Trent.”

Whatever may be the reasons, TESCO has decided to make a foray in India, much to the relief of the Indian Government, whose FDI policy had fallen flat on its face for 15 long months. TESCO's $100-million proposal has already been processed by the Department of Industrial Policy and Promotion (DIPP) and set to the Foreign investment promotion board, both being Government owned entities. Regarding details of TESCO proposal, I quote from a report:

The company will open 3-5 stores every year under the brand names of Star Bazaar, Star Daily, Star Market and Star Extra that will give employment to 600-800 people every year. Both Trent and Tesco will hold 50% each after the induction of foreign equity. TESCO plans to invest at least 50 million Dollars for development of backend infrastructure, that will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agricultural market produce infrastructure.”

On its part, TATA's have agreed to sell off four stores owned by Trent Hypermarkets, that are located in states that do not allow foreign direct investment in multi-brand retail. It also proposes to obtain special permission to operate it's existing store in Kolhapur, a city with less than 1 million population, where such multi brand stores may not be set up under present Government FDI rules.

TESCO's proposal seems to have brought cheer to the commerce ministry as so far its FDI policy had no success at all. Considering the success of some of India's indigenous retail store chains like Big Bazar or Reliance Fresh and the large middle class clientele that has been captured by them, TESCO-TATA venture is most likely to be reasonable success. As a consumer, I hope that more such multi- brand stores come in and the hegemony of marketing federations and middlemen is broken once for all, benefiting the ordinary customers like me.

23rd December 2013

No comments:

Post a Comment