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Tesco treads cautiously in India
Due to clauses on local sourcing and infrastructure investments, the world's third largest retailer has not been able to make much headway in India.
While talking about Tesco's plans for India, China and Turkey last week after the announcement of the retailer's 2012-13 results, Chief Executive Philip Clarke was particularly silent on its India plans.
Save for a passing reference, there was no word on opening stores in India or the size of the potential investment.
Tesco insiders say even though rules were relaxed to allow foreigner to own a majority stake in an Indian retailer early this year, the world's third largest retailer has not been able to make much headway, largely because of the clauses on local sourcing and infrastructure investments.
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Tesco treads cautiously in India
Multi-brand retailers with foreign investment are required to source 30 per cent of goods from small-and-medium enterprises locally, and invest $100 million in the first three years of setting up shop.
"The riders put by the government such as $100 million investment in back-end operations, city-specific restrictions and approval by states has been a dampener for global retailers," says Arvind Singhal, chairman of retail consultancy Technopak Advisors.
Tesco entered India in 2008 after striking a deal with Tata's Trent to provide back-end support to its Star Bazaar hypermarkets.
However, the company has failed to bring its whole gamut of IT services into the country because of the limited scale at which Trent's hypermarkets operate.
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Tesco treads cautiously in India
Tesco has also put its plans to enter the wholesale market in India with 50 cash-and-carry stores on hold.
The company, for now, is treading cautiously and focusing on boosting its international sourcing and tech services. It hopes to increase sourcing from India and hire 1,000 more people for its tech service centre in Bangalore.
The company is clearly finding it hard to replicate the success of its global models here. Its private labels, which account for 40-45 per cent of total sales in the UK, make up for only a small fraction of Star Bazaar's sales.
In contrast, in its home market, Tesco has thousands of stock keeping units in private labels in almost all conceivable categories from wine to baby diapers.
"It (Star Bazaar) does not have that much scale to bring many of Tesco products here," says an industry executive.
Tesco has brought in over 250 stock keeping units of its private brands in Star Bazaar which it wants to double in the next couple of years.
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Tesco treads cautiously in India
The executive adds that laws on standard weights and measurements and maximum retail price, which are peculiar to India, have also been a deterrent in the success of private labels. In India, products cannot be sold at arbitrary pack sizes such as 61 grams or say 73 grams.
Consultants say Tesco also could not introduce its good-better-best (value, premium and finest segments) approach in India.
"It could bring either one or two range due to limited opportunities here. Ideally, it would want to bring more but volumes would not justify," says Naimish Dave, director at OC&C Consultants, a global management consultancy.
A Tesco India spokesperson says: "Tesco products which suit the tastes and preferences of Indian consumers and meet the price-point expectations prevalent in the market are introduced on an on-going basis."
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Tesco treads cautiously in India
The limited scale of operations has led to the company foregoing many of its international best practices in India.
For instance, Tesco is not using the services of "dunnhumby", its subsidiary which specialises in data analysis, although it has an office in India. Dunnhumby's services could have helped Star Bazaar in tailoring offerings according to the needs of local customers, consultants say.
In international markets, 60 per cent of Tesco's food range is differentiated by socio-demographic groupings across its stores with the help of dunnhumby.
"We did not use dunnhumby's expertise in this venture as Star Bazaar operations were not commensurate with the scale with which dunnhumby operates," says the executive, while adding that Tesco will use it once India business achieves scale.
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Tesco treads cautiously in India
The company has also not launched its e-commerce portal in India for the same reason.
"Tesco believes in providing global know-how and expertise that is appropriate to the needs of the market and the stage at which the business is," says the company's spokesperson.
Devangshu Dutta, chief executive of retail consultancy Third Eyesight, says Tesco has not been able to bring its various strengths due to policy restrictions.
"Policy restrictions limit the freedom with which they can operate. If they had full control on the business, they would have brought lot many things," Dutta says.
However, executives at Star Bazaar say despite the limitations, Tesco has been able to bring a lot to the partnership. Tesco's back-end and technology support have enhanced customer experience at its stores.
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Tesco treads cautiously in India
For instance, its "planogram" software, which helps retailers display products, might have helped Star Bazaar, says Sanjay Badhe, an independent retail consultant.
Tesco has also helped Star Bazaar develop its own private labels in many categories such as noodles and ketchups.
"Compared to others, Star Bazaar is doing reasonably well, they have not gone overboard. They went in a measured way with appropriate sizes. They have many processes and systems in place because of Tesco," says Dave of OC&C.
However, unless doubly sure, Tesco is unlikely to go solo or scale up its business in India.
A former Tesco employee says: "Tesco has reached this level in the UK after 80-90 years. In India, these are initial years for the company. Till the time it doesn't see viability in business, it will remain the way it is today."
