To the owner of a supermarket chain, India must look like the Klondike circa 1896, just before the gold rush begun.
It’s a country where the middle class is expanding rapidly – there are set to be 65m middle-income households by 2010, from 40m just now, according to consultant McKinsey & Co. That would make it the world’s fifth-largest retail market. By 2015, New Delhi-based Technopak Advisors reckons that the local retail industry will have doubled in size to more than $600bn, from around $300bn this year.
And yet at the moment, as much as 97% of the country’s consumer spending is done in local stores.
So it’s no surprise that Tesco has proved extremely interested in entering the market, particularly as the government is considering relaxing restrictions on foreign investors in the sector. But it looks like those expansion plans will have to wait a while…
Tesco has been pipped to the post by arch-rival Wal-Mart in the race to enter India. The company ended talks with Bharti Enterprises to set up a joint venture in the country earlier this week.
Stores which sell more than one brand (in other words, supermarkets) need a foreign partner to be allowed to enter India. No reasons were given for ending talks, but ’sources’ suggested that Tesco was unhappy with the planned pace of expansion – it wanted to take things slower – and also with the level of control it would have over future plans.
Of course, any Indians worried about protecting their local high street may well be very pleased to hear that Tesco has pulled out for the moment. But the news that Wal-Mart has partnered up with Bharti is likely to wipe any smiles off their faces.
The two firms will set up a joint venture for the logistics and wholesale aspect of the business , while Bharti will own the retail side. Bharti expects to open several hundred stores, with the first opening expected in August next year. Wal-Mart already sources clothing and shoes in the country.
So is this bad news for Tesco? Well, perhaps not – maybe it’s best to let its rival test the water. Wal-Mart has a chequered history of success with taking its brand of retailing to other countries. It had to sell off its German arm recently, losing $1bn in the process, after resolutely failing to impress locals. The India Daily seems to think that the same fate lies ahead for Wal-Mart’s Indian venture:
“Indian companies look at these alien corporations as a bridge or jump board to success and nothing more… Tesco took a smart move as it finally withdrew from long-running discussions with Bharti… Tesco walked out because of lack of control and accountability.”
The partnership is certainly interesting. Bharti is a telecoms group, and the move into supermarket retail is the company’s “biggest diversification” away from that business, says Bloomberg. Meanwhile, the parent group of one of its biggest local competitors, Reliance Retail, owns the world’s third-largest oil refinery.
But others are more optimistic about the venture‘s prospects. Viswanathan Vasudevan, fund manager at Singapore’s Aquarius Investment Advisors, tells Bloomberg: “It’s a great firm for Wal-Mart as Bharti knows the rules of the game and will save Wal-Mart a lot of time and energy to overcome the system. For Bharti, you can’t get a better partner than Wal-Mart in retail.”
In any case, the Indian market looks large enough at the moment to sustain quite a few competitors in the arena, probably one reason why Tesco is content to take its time. Andrew Kasoulis of Credit Suisse told The Times: “I don’t think that there is any such thing as a first-mover advantage in these new markets and if the right thing is to wait, then so be it.”
Given Tesco’s success in the UK, we’re inclined to agree that if Terry Leahy decided the terms weren’t right, then he’s probably right.
Turning to the stock markets…
Weakness on Wall Street saw the FTSE 100 fall 72 points to close at a session low of 6,060 yesterday. BAE Systems was one of the biggest fallers following reports at the weekend that a large Eurofighter order from Saudi Arabia could be scrapped. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 closed 80 points lower, at 5,308 – its fourth consecutive session of losses. In Frankfurt, the DAX-30 was also sharply lower, closing down 113 points at 6,298.
Across the Atlantic, stocks suffered heavy losses. The Dow Jones closed 158 points lower, at 12,121, with retailer Wal-Mart weighing heavily. The Nasdaq lost over 2% of its value, falling 54 points to end the day at 2,405, as search engine Google lost over 4% of its value. And the S&P 500 closed 19 points lower, at 1,381.
In Asia, the Nikkei was hit by profit-taking and closed 30 points lower at 15,855 today.
Crude oil was trading at $60.27 this morning, whilst Brent spot was at $60.47 a barrel in London.
Spot gold last traded at $639.20 this morning, having reached a high of $641.70 overnight. Meanwhile, silver had edged up to $13.47 an ounce.
And in London today, troubled broadcaster ITV named former BBC Chairman Michael Grade as its new executive chairman. The appointment comes just a week after the company rejected a takeover offer from NTL and at a time when ITV is suffering from both falling ratings and revenue. Shares in ITV had risen by as much as 2% this morning.
And our two recommended articles for today…
Where to look for long-term profit
– For successful long-term investing, investors should take note of certain key themes, says Martin Spring, from the growing power of emerging markets to forthcoming resource shortages. If you want to know which investments – many of them currently ignored, under-appreciated or considered too far ahead of the market by the majority of investors – have the most potential, read: Where to look for long-term profit
Why private equity is playing for high stakes
– James Bond films have an ‘uncanny knack of mirroring reality’. And the latest, Casino Royale, seems to be mirroring the high stakes games currently being played in markets around the world. Some of the biggest risks are being taken in the private-equity sector. But are the stakes simply too high? Merryn Somerset-Webb looks at which blue-chips could be the next targets. Click here: Why private equity is playing for high stakes