Tesco buys stake in retail venture for HK$4.33b

Top British retailer Tesco will pay HK$4.33 billion to gain 20 per cent of a venture with China Resources Enterprise that will run supermarkets and other stores on the mainland and in Hong Kong.

The venture, announced in August, will combine Tesco's 134 outlets and shopping centre business on the mainland with the almost 3,000 stores owned by the state-backed conglomerate on both sides of the border. The two firms planned to run supermarkets, convenience stores and liquor shops in greater China, China Resources, which will hold 80 per cent of the venture, said in a statement yesterday.

The deal would allow Tesco to expand in China's US$574 billion hypermarket industry while ending almost a decade of independent operations as sales decline amid competition from rivals such as Sun Art Retail. China Resources, which runs the country's second-largest hypermarket business, would gain from Tesco's expertise in areas including private labels, e-commerce and international sourcing, the companies said.

"Through this deal, we have a strong platform in one of the world's most exciting markets and it will move us more quickly to profitability in China," Tesco chief executive Philip Clarke said in a separate statement.

Tesco would have two out of a maximum of 10 seats on the board of the venture, whose annual sales are estimated at £10 billion (HK$125.7 billion), the England-based company said. Completion of the deal is expected in the first half of next year, subject to regulatory and shareholder approval.

Retailers including Tesco are facing slowing economic growth amid competition on the mainland.

In addition to hypermarkets, Tesco owns 11 Lifespace shopping centres in the country and eight in 50-50 joint ventures with local partners.

China Resources and Wal-Mart Stores are tied for second place in the mainland's hypermarket industry with an 11 per cent share each last year, according to Euromonitor International. Sun Art, backed by France's Groupe Auchan, was the market leader with 14 per cent, while Tesco ranked eighth with 2.4 per cent.

Revenue in the industry would probably expand to 864 billion yuan (HK$1.1 trillion) by 2015, a 50 per cent gain from last year, Euromonitor said.

Shares in China Resources rose 1.4 per cent to finish at HK$25 yesterday. The benchmark Hang Seng Index gained 0.55 per cent.

Tesco is exiting international markets after almost two decades of overseas expansion took the focus off its home base. It agreed in June 2012 to pay £40 million to leave its Japanese joint venture and said last month that it was exiting the United States.

The British retailer started selling goods in China in 2004 and generated £1.4 billion of sales in the country last financial year, according to its website. Sales for its China stores open at least a year dropped 4.9 per cent in the first quarter amid consumer concern over bird flu and weaker demand for pork after a national food safety scare.

The firm scaled back efforts in China last year to focus on building more profitable businesses, Clarke said in April. It has adopted a more cautious stance in the country and shut five underperforming outlets to focus on its strongest regions.