The Hindu Business Line : Trent deal with Tesco, a positive

The UK’s largest retailer will invest £60 million (close to Rs 500 crore) over the next two years to launch cash-and-carry stores. These are B2B outlets, which will target India’s kirana store owners.

Tesco has also announced a franchise agreement with Tata-owned Trent.

Tesco will provide its retail expertise to Trent to help the latter expand its hypermarket operations in exchange for a fee. While the deal is a positive for Trent, it might not result in a significant growth in profits, unless Trent steps up its pace of store additions.

Trent has been the laggard in the Indian retail space. It operates about 30 Westside stores in the country, which are well known for their private labels. While that business is profitable, its hypermarket business, run under the Star India Bazaar brand has been a drag on margins.

Although Trent entered the hypermarket business early enough in 2004, it has been unsuccessful in ramping up this business and operates all of four stores currently. Trent’s operating margins declined to about 3 per cent in FY-08 from 6.6 per cent previously.

Moreover, slow pace of store additions have also not helped revenue growth, which has been at a relatively sedate 15 per cent compared with the 30-50 per cent growth rates logged by other retailing companies.

Tesco’s expertise

Tesco’s substantial retail expertise, especially in the groceries business, might help improve Star Bazaar’s operations.

The stores may have better merchandise and it might be able to manage its supply chain more efficiently. However, as far as sourcing goes, it needs to be noted that Trent does not exactly have exclusive access to Tesco’s wholesale operations, which will be open to all retailers.

While the tie-up might have strategic merits, therefore, further ramp up in revenues and profits of Trent is still dependent on its pace of execution. The company plans to take the Star Bazaar store count to 50 over the next five years, but its execution track record has not been as impressive as its peers.

In light of this, the stock’s 10 per cent gain on Monday appears to have been an over reaction.

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