MUMBAI: Tesco, UK’s supermarket group, on Tuesday announced plans to develop a wholesale cash-and-carry business in India, committing an initial investment of up to £60 million (Rs 480 crore) in the first two years. The wholesale outlets, which will be initially set up in Mumbai, will sell fresh food, grocery and non-food products to small retailers, restaurants, kirana stores and other business owners.

The world’s third-largest retailer, with sales of $99.9 billion, has also signed an exclusive franchise agreement with Trent, the retail arm of the Tata Group. Trent will draw on Tesco’s retail expertise and technical capability to support the development of its hypermarket business, Star Bazaar, for which Tesco will be paid a fee.

Tesco’s wholesale business will also supply merchandise to Star Bazaar. At present, foreign retailers are only allowed to sell to retail consumers through franchisees and licencees. Current norms allow 100% foreign direct investment (FDI) only in cash-and-carry wholesale formats, the model chosen by Germany’s Metro and South Africa’s Shoprite Holdings which already operate in India.

Cash-and-carry can only sell to other retailers and not to individual consumers. ET Online broke the story on Tuesday morning. The announcement ends months of media speculation about a possible partnership between the two high-profile groups. Tesco was reported to be in joint venture talks with several leading Indian business groups, including the Tatas and Mahindra & Mahindra.

It had earlier almost finalised a joint venture in late 2006 with Sunil Mittal’s Bharti Enterprises before the latter opted for Wal-Mart. Tesco’s international division, which accounts for almost 40% of group sales, reported a 13.9% rise in sales with strong growth in Europe and Asia. Tesco CEO Sir Terry Leahy said: “It complements our entries into China and the US, giving us access to another of the most important economies in the world.

Our agreement will enable us to share our global retail expertise, supporting Trent in the development of their Star Bazaar hypermarket business.” Tesco is a multi-format retailer and operates hypermarkets, superstores, supermarkets and convenience stores. The group, which ahs operations in 13 countries, runs 3,729 stores and employs over 440,000. It has 814 stores in Asia in markets like China, Japan, Malaysia, South Korea and Thailand.

At present, Tesco sources over £170 million worth of Indian products each year, with sourcing offices in Delhi, Bangalore and Tirupur. It also employs nearly 3,000 Indian staff at its Hindustan Service centre in Bangalore, providing IT, financial and business services to the entire Tesco Group. Trent MD Noel N Tata said: ”Our ability to access Tesco’s retail knowledge and expertise will play an important role in our endeavour to offer a unique shopping experience to customers across the country.

Their wholesale cash-and-carry business will provide us with the opportunity to tap into a world class supply chain.” Trent’s retail formats include the hypermarket, Star Bazaar, departmental stores, Westside, and bookstore, Landmark (as a subsidiary). Trent will invest Rs 2,000 crore to set up 50 Star Bazaars over the next few years. Infiniti Retail, a wholly owned subsidiary of Tata Sons, operates a national chain of multi-brand electronics stores under the brand name Croma with a technical and sourcing agreement with Australian retail giant Woolworths.

Trent has been grappling with a slowdown in the June quarter sales. Though the scenario is not as bad compared to March quarter, where sales growth was negative, the company managed a low 2.7% growth for the first quarter of FY 2008-09. However, sales have declined by 600 basis points on a year-on-year basis. Slower roll out of its value format store ‘Star Bazaar’ could be one of the reasons for the slowdown.

In the lifestyle segment, the company is struggling to keep its input costs under control. The company has, however, managed to maintain its net profit margins at 6% which had declined to almost 1% in the March quarter, a whopping 500 basis points increase. As more value format stores become operational, the company would be able to make use of its economies of scale. Being a private label retailer, Trent is better placed as compared to its industry peers as margins are higher in in-house brands.

Retail analysts said the deal makes sense for both groups. “Tesco is clearly focusing on building up capabilities in the country and preparing for a strong presence in the Indian market until FDI rules in retail are relaxed. How mutually beneficial the partnership pans out to be in the long run needs to be seen.

The association may even strengthen into sharing stakes in the long run. For now, the Tata group has merely offered a supporting role for Tesco’s entry, which will help it to access the retail heavyweight’s expertise,” said an analyst with a foreign research firm