The stock of retailer Trent closed the day with a 5.7 per cent gain. The stock, in fact, shot up about 9.7 per cent during the day, before cooling off a tad. It rose on Tuesday too.
The gain in the stock can be attributed to Tesco completing its purchase of shares in Trent’s hypermarket arm on Wednesday. The deal was first announced in December last year.
Tesco, through a wholly owned subsidiary, has paid ₹150 crore for shares held by Trent in Trent Hypermarket. It has also subscribed to additional shares of Trent Hypermarket for about ₹700 crore.
This partnership is set to operate the chain’s outlets in Maharashtra and Karnataka. These two States house 10 of the Star Bazaar chain’s total of 16 stores (as of end-December 2013).
Trent already had a supply arrangement with Tesco’s Indian wholesale subsidiary, and access to Tesco’s expertise in retail operations and technical capabilities.
Boosting profitability The partnership now will help boost the profitability of the hypermarket venture, which, while recording strong revenue growth, is also incurring losses. In 2012-13, for example, while revenues were up 21 per cent to ₹785 crore, EBIT losses rose 23 per cent to ₹64 crore.
The hypermarket business requires heavy investments in supply chain. For one, food and groceries, which consumers buy the most, carry low margins. Two, hypermarkets often price products at discounts. This, therefore, necessitates strict cost controls to maintain profit margins.
The FDI rules require at least half the foreign investment to go towards supply chain development, which can help bring down costs over the long term.
Going forward, if FDI in multi-brand retail is reversed by the new Government, the effect on Trent’s agreement with Tesco remains to be seen.