India’s Foreign Investment Promotion Board (FIPB), a unit of the Finance Ministry, has approved Tesco’s proposal to invest $110m to set up supermarkets in the country.
Earlier this month, Tesco became the first foreign supermarket operator to venture into India’s $500 billion retail sector after announcing it had applied to buy a 50% stake in Tata Group’s Trent Hypermarket Ltd.
The UK-based firm became the “First global retailer” to get approval to enter country’s “Multi-brand Retail sector” from the Foreign Investment Promotion Board (FIPB) since the government allowed 51 per cent foreign direct investment (FDI) in multi-brand retailing in September last year.
The retail major plans to initially invest $110 million in the multi-brand retail foray, including for the acquisition of 50 per cent stake in Trent Hypermarket Ltd, a wholly-owned subsidiary of Trent Ltd.
The world’s third-largest retailer already had a franchise agreement to provide support to Trent’s Star Bazaar chain. In 2008 Tesco PLC had announced setting up of a wholesale cash-and-carry business in India, with an initial investment of up to 60 million pounds in the first two years.
It had also entered into an exclusive franchise agreement with Trent to provide expertise and technical capability to support the Indian firm in the running of hypermarket business, under Star Bazaar stores. Under their existing partnership, Tesco’s wholesale business supplies merchandise to Star Bazaar.
The decision brings much-needed relief to the Indian government, which had failed to attract a single application since September 2012 when it allowed foreign investors to own up to 51% of their operations.
Some retail analysts have tipped India as one of the last great untapped markets for supermarkets.It is also a sign that Tesco remains ambitious to expand abroad, despite its decision to close loss-making businesses in Japan and the US and a big investment drive to turnaround its under-performing stores in Britain.
While the proposed investment is not large, the move by Tesco will be seen as a vote of confidence in India’s potential at a time when the economy is struggling and grew at its slowest pace in a decade last fiscal year due largely to a lack of corporate investment.
The ruling Congress party paid a high political price for opening the retail market, losing a key coalition partner over worries the policy will wipe out India’s millions of family-owned grocery stores.
The government and global retailers say the policy will create jobs and help overcome chronic bottlenecks in food supply that means much farm produce rots and has made high food inflation a structural problem. Vegetable prices have risen 115% since March.
Recently the world’s biggest supermarket Wal-Mart Stores called off its Indian wholesale joint venture with Bharti Enterprises, citing unfriendly regulations.
Tesco plans to invest in Star Bazaar’s stores in the western state of Maharashtra and neighbouring, Karnataka. Star Bazaar currently runs 16 stores in southern and western India.