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Franchise route likely for Future, Carrefour tie-up

December 13, 2010 14:19 IST

With no sign of multi-brand retailing being opened to foreign direct investment (FDI), negotiations between Future Group and French retailer Carrefour may lead to a toned down joint venture agreement with no equity component.

Sources familiar with the developments said on condition of anonymity that in the current policy regime, a franchise agreement between the two seems to be a viable alternative. As and when the sector opens up to FDI, the world's second-largest retailer will automatically get equity in Pantaloon Retail or will enjoy right of first refusal, said the sources.

Hopes of the JV being revived have been running high ever since Future Group CEO Kishore Biyani visited Paris earlier this week to meet his counterparts at Carrefour after a gap of almost a year.

Accompanying him were senior representatives of his finance team and legal advisors AZB & Partners.

"It's still an ongoing negotiation. A concrete deal is still some months away. The modalities of the joint venture agreement are still being worked out," said a company spokesperson.

"It's work in progress. Talks are not over yet... We have to be prepared for any future developments that may take place in the sector," Biyani told Business Standard, describing the ongoing dialogue. He refused to furnish any more details.

Retailers have been expecting some forward movement since July, when the government had sought the opinion of stakeholders about allowing FDI in multi-brand retail.

But with the regulatory status quo maintained, sources said the focus for the time being for Future Group and Carrefour will be on finalising a master franchise agreement on the latter's hypermarket foray into India.

A franchise agreement will mean no equity infusion from Carrefour. The ownership of the entity will be squarely in Indian hands and Future Group will have exclusive rights to use the Carrefour brand in India on payment of a royalty. Typically, royalty payments in retail are 1.5-2 per cent of annual sales, said sector analysts.

The focus will be on single-floor high-end hypermarkets of around 150,000-200,000 sq ft.

These hypermarkets will be separate from Big Bazaar and Food Bazaar in look and feel as well as in their premium product offerings. They will operate under their own brand name.

The plan is to open two or three Future Carrefour hypermarkets in each metro. But keeping in mind the large requirement for each store, the challenge will be locking prime real estate.

In Mumbai, for example, the eastern suburb of Mulund is likely to be one location for a Carrefour hypermarket. Vasant Kunj in Delhi is likely to see another.

Hypermarkets usually reserve 70 per cent of their shelf space for food, and with Carrefour's global expertise in poultry and dairy, industry experts feel the alliance will bridge a key gap in Biyani's portfolio.

"Biyani needs a global partner. To start with, you get global technology and best practices. But more importantly, it's going to give Future Group bargaining muscle to negotiate better sourcing terms from global FMCG players like a Nestle, Unilever and P&G, as they already have bigger relationships with Carrefour," said the head of another retail chain, who did not wish to be identified.

The Future-Carrefour entity is to be housed under Future Value Retail, a drop down 100 per cent subsidiary of Pantaloon Retail, the group's listed retail holding company. Hypermarkets Big Bazaar and Food Bazaar, as well as KB's Fair Price outlets are divisions of Future Value Retail.

Plans of Carrefour picking up 50 per cent equity in Future Agrovet may not fructify as yet, either.

Agrovet, the food sourcing company for Big and Food Bazaars, is poised to be the common sourcing and procurement company for all the divisions of Future Value Retail.

But with the current lack of clarity on sourcing from group companies, the plan for an equal equity partnership also seems to be on the backburner.

Carrefour will continue to own and operate its independent cash & carry operations for wholesale trade channels.

Carrefour currently has two separate units in India, operational since 2007. Carrefour WC&C India is rolling out fully-owned cash & carry stores, and Carrefour India Master Franchise, which has been trying to tie up with an Indian partner to open Carrefour branded stores throughout the country.

Carrefour's has in the past unsuccessfully tried to forge a tie up with the Tatas, Wadias and Bharti.

But India's $400-billion annual retail market continues to be of strategic importance for the French giant, so despite realigning its assets in Asia via strategic selloffs, India continues to blip in its radar.

 

Arijit Barman in Mumbai
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