British retailer Tesco (LON:TSCO) confirmed Friday that it has signed a joint-venture agreement with Tata Group’s retailer in India, Trent Hypermarket (BOM:500251) for $140 million, news reports said.
The third largest retailer in the world, Tesco got the approval from Indian Foreign Investment Promotion Board, or FIPB, to formally enter the country’s $500 billion retail sector on Friday by sealing the agreement with Tata’s Trent. Tesco and Trent together will operate 12 stores under the brands ‘Star Bazaar’ and ‘Star Daily’ across the southern and western regions of the country. The merchandise will include food and groceries, personal and home-care products, home and kitchen items, and fashion and accessories.
“Following its previous announcement and receipt of approval from the Indian Foreign Investment Promotion Board, Tesco has today entered into an agreement with Trent Limited, part of the Tata Group, to form a 50-50 Joint Venture in Trent Hypermarket Limited (THL), which operates the Star Bazaar retail business in India,” Tesco said in a statement Friday, adding that other final approvals were still awaited.
Tesco had signed a wholesale agreement in 2008 to supply goods to Tata’s Star Bazaar and Star Daily stores, and with this new agreement, Tesco has become the first global supermarket to decide on investing in India, since the government allowed Foreign Direct Investment, or FDI, in September 2012.
“We have been working with Tata in India for over five years, supporting the development of their Star Bazaar and Star Daily multibrand retail stores via the provision of wholesale and franchise agreements,” said a Tesco spokesperson according to Mint, a local newspaper, adding, “We’re delighted to be taking this step, and look forward to working together to bring the best of our retail experience to the benefit of India’s consumers.”
There has been confusion regarding the FDI policy in the country on various rules. One of them is that the foreign company must set aside 50 percent of their investment to set up back-end infrastructure, without clarifying much on the term "back-end." Another confusing topic has been the 30 percent of goods that need to be sourced from small-scale firms.
Retail giants like Wal-Mart (NYSE:WMT) announced last October that it ended its partnership with Bharti (BOM:532454) with whom it had been operating since 2007. Swedish furniture chain Ikea, which had announced a $2.07 billion investment into the Indian market, is expected to open its first store by the end of 2016.