Tesco goes local to woo China

Nine years after it first tried to crack the Chinese market, Tesco, the British grocery store chain, said Wednesday that it would abandon its solo approach and form a partnership with a state-run supermarket operator in hopes of a stronger expansion in the country.

The retailer, which has failed to turn a profit in China despite repeated capital investments, said it would pay 345 million pounds (about $558 million) to fold its Chinese operations into a new joint venture with China Resources Enterprise.

The alliance, which requires regulatory and shareholder approval, would give Tesco a 20 per cent stake in a combined operation.

It will control more than 3,000 stores in China, including locations in seven of its most populous and affluent provinces. Tesco now operates about 134 stores in China, up from about two dozen when it entered the market in 2004.

China is “a huge country and a huge opportunity,” said Laurie P McIlwee, Tesco’s chief financial officer. But, he said, it was very difficult “to get your arms around it without very strong local connections.”

This latest retrenching by Tesco follows the sale this year of most of its US business to an affiliate of Yucaipa, the private equity firm owned by billionaire Ronald W Burkle. It also divested its Japanese operations in 2011.

“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,” Philip Clarke, the chief executive of Tesco, said in a statement.

Also Wednesday, Tesco reported sharply lower profit for the first half of its financial year. The retailer said profit had declined 34 per cent, to 820 million pounds, in the first half compared with the period a year earlier.

Tesco also had weaker same-store sales, which were flat in Britain, its largest market, and down 5 percent in Europe, where it has been hit by downturns in countries like Ireland and Poland.

Tesco, the third-largest supermarket chain in Britain, after Wal-Mart stores and Carrefour of France, remains a dominant player in this country and many of the European markets where it operates.

But Tesco, like many multinational retailers, has struggled to gain a significant piece of the fast-growing Chinese grocery market.

Supermarket sales in China were 1.8 trillion renminbi (about $294 billion) last year, up 10 per cent from 2011, according to figures from Euromonitor International, a global research company. Sales are forecast to rise 25 per cent by 2015.

Yet the sector remains highly fragmented, with no supermarket chain capturing more than 5 per cent of the country’s market. Tesco’s new partner, China Resources, was the largest grocery retailer in China last year, with about 3 per cent of the market, according to Euromonitor.

Despite being the fourth-largest modern grocery retailer in China last year, Tesco’s operations had a loss of 83 million pounds in the first half of the fiscal year.

McIlwee, Tesco’s financial chief, said the joint venture would allow the company to benefit from the much larger footprint of China Resources’ chain of Vanguard stores, while sharing its knowledge about supply-chain forecasting and other innovations - all without a continued drain on its capital.

“In the US and Japan, we had very tiny, tiny business with a tiny, tiny share,” McIlwee said. “With this, we’re the 20 per cent owner of the market-leading business in China.”
The Tesco stores in China will be re-branded Vanguard, but the Tesco name will remain on its in-store line of merchandise and may be used on future stores in China, McIlwee said.
The joint venture, which is expected to be completed in 2014, plans to operate hypermarkets, supermarkets, convenience stores, cash-and-carry wholesale businesses and liquor stores.

The deal also gives Tesco an option to increase its stake in the venture to 25 per cent within the next five years or if the new company seeks an initial public offering.

China Resources is also one of the companies that has been identified as a bidder for the Hong Kong supermarket chain, ParknShop, of the billionaire Li Ka-shing, a sale that could command $3 billion to $4 billion.