Tesco venture takes fresh crack at China market

Britain's largest grocery chain seeks to recover from a 9-year struggle in the sector through partnership with China Resources Enterprise

PUBLISHED : Saturday, 10 August, 2013, 12:00am
UPDATED : Saturday, 10 August, 2013, 4:40am

Tesco, Britain's largest grocery and general merchandise chain, has signed a memorandum of understanding to establish a joint venture with China Resources Enterprise in a bid to revive its fortunes in the world's most populous country.

CRE, China's second-biggest operator of hypermarkets including the Vanguard chain, would take an 80 per cent stake in the joint venture, and Tesco the remainder under the deal signed on Thursday, said a CRE statement submitted to the Hong Kong stock exchange yesterday.

"The possible establishment of a joint venture … will serve as the exclusive platform for the parties to engage in the operations of hypermarkets, supermarkets, convenience stores, cash and carry business and liquor stores in the [mainland], Hong Kong and Macau," it said.

A person familiar with the deal said the new retail alliance covered a broad range of business synergies in the areas of central procurement, private label products, as well as advanced logistics and information technology management. Statements issued by both companies on the partnership did not elaborate on the areas of co-operation.

The British group, which is the third-biggest retailer in the world by revenue and has been operating on the mainland since 2004, has been struggling in the fiercely competitive market.

It now operates about 130 stores on the mainland, after closing five since August last year because of lacklustre performance.

Two investment bankers said Tesco was hoping the joint venture would upgrade its product mix and help it differentiate from foreign rivals, which either operate high-end specialised retail models or, at the other extreme, run low-cost hypermarkets.

Foreign hypermarket firms had started out on the mainland expanding aggressively, only to realise this was a far harder market to crack, at least without the support of domestic players.

Tesco, which continues to post losses even after nine years in China, notched up just 150 million yuan (HK$190 million) of average sales per store at its 121 outlets last year, compared with the break-even level of 250 million yuan, according to an industry report by China Business Journal brought out by the Chinese Academy of Social Sciences.

In its annual report last year, Tesco said it would focus on building scale in the country but would go about it cautiously.

The venture could be a win-win for both, where CRE could gain entry into Tesco's major footprints, Shanghai and northeastern provinces, said Charlie Chen, a consumer analyst with BNP Paribas.

With the mainland retail market being highly fragmented, some big players such as US giant Walmart and French retailer Carrefour have started streamlining their supply chains by cutting out middlemen and sourcing directly from manufacturers, which has proved to be an effective strategy for gaining economies of scale.

China Business Journal said Vanguard, which saw sales growth of 13.8 per cent last year to 94.1 billion yuan, was ranked fourth among the country's top 100 retailers.

In April, Tesco posted its first profit fall in two decades and said it was exiting the US market. Last year, it gave up on Japan after trying to crack that market for nine years.