French grocer Auchan has signed a franchise agreement with Landmark Group (India)-owned Max Hypermarkets to develop hypermarkets in India.

Auchan is to link with Max Hypermarkets and will rebrand 13 Spar stores

The partners plan to open 12 to 15 stores across the country within a year and will rebrand 13 existing Spar hypermarkets to the Auchan banner by the end of the current fiscal year. Hypermarkets are, as yet, unimportant in India because of their relatively small share of the country’s huge retail market, but they are a growth format of the future.

Both retailers are said to have been in talks since February about the formation of a joint venture.

However, owing to current rules for foreign direct investment (FDI) in multi-brand retail in India, they signed a franchise agreement similar to the one Landmark had with Spar International, which will expire in December. Once that partnership ends, both Landmark and Spar International intend to pursue separate strategies to expand their retail presence across the country.

Landmark has aggressive growth plans for India across various formats and believes Auchan is the right partner to help. International expansion is critical for Auchan, especially to offset sluggish growth in Western Europe, a region that represents about two-third of its sales.

There, growth has dipped due to the grocer’s over-dependence on the struggling hypermarket format (which accounts for more than 75% of its domestic sales) and the fragility of the economic environment in Spain and Italy, two of its major international markets.

India is one of the few markets where the big three – Walmart, Carrefour and Tesco – compete in some shape or form. In common with other established retailers, Auchan is likely to change its partnership as and when the FDI regulations on multi-brand retail are further relaxed and may very well set up hypermarkets on its own.

FDI rules are likely to be relaxed in phases – perhaps some time in 2014 when India’s current government leaves office and the country elects new representatives.

Auchan is taking the franchised route for entry into India, saving on the cost of establishing stores. Yet it remains unclear whether the grocer will be able to lead the country’s hypermarket sector.

In India, domestic hypermarket players already have a strong position and Auchan will have to invest into its brand image if it is to measure up to the competition.

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