Tesco confirmed today it is entering a joint venture with China Resource Enterprise (CRE), which will see its Chinese stores combined with CRE’s Vanguard business.
Tesco will stump up £185m to form the joint venture, in which it will take a 20% stake. It will also make two further payments of £80m on completion of the deal, expected in the first half of 2014, and on the first anniversary of the deal.
The UK retailer said the new venture would have sales nearing £10bn and would combine the best of Tesco’s retail knowhow with CRE’s local expertise.
Progress on the home front, though slow, only partially offsets analysts’ concerns over Tesco’s international ventures.
“We are delighted to work with CRE to create the leading Chinese retail business,” said Tesco CEO Philip Clarke. “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.”
Hong Jie, chief executive officer of CRE, added: “Along with the internationalisation of the Chinese economy, CRE has developed successful partnerships with many well-known international companies in China. We are excited about continuing this track record of our retail business by joining forces with Tesco.”
Tesco and CRE first revealed their intention to merge their operations in China in August, as the UK retailer looks to retrench and reorganise its international operations. This morning, Tesco revealed sliding profits in its European and Asian businesses, while earlier this week it put its US chain Fresh & Easy into Chapter 11 bankruptcy to clear the way for its sale to private equity firm Yucaipa.
Tesco’s China operation comprises 134 stores in 11 provinces. Its losses before tax for the year ending February 2013 were £222m.
CRE’s Vanguard stores number 2,986 and its profits after tax for the year ending 31 December were £22.7m.
“Tesco has shown it is unafraid to take tough decisions, and the exit from the US is now followed by Tesco addressing the China ‘issue’,” said John Pal, retail expert at Manchester Business School. “Brand loyalty, price consciousness and convenience could all be consumer drivers in China, but given the size of the country, the size of the population and different tastes, a ‘one size fits all’ approach is not appropriate.
“Only by getting close to customers will Tesco survive and prosper, and entering a joint venture with a local operator makes perfect sense”
“Whilst former CEO Terry Leahy may not be the flavour of the month for Tesco shareholders, he was right in his famous remark that ‘Retailing is a local activity’. Only by getting close to customers will Tesco survive and prosper, and entering a joint venture with a local operator makes perfect sense.”
Writing in The Grocer, Qing Wang, professor of marketing and innovation at Warwick Business School, said that Tesco could not afford to abandon China: “Tesco is not going to give up on China. It can’t. In 2011, the Chinese grocery sector became the number-one market in the world in terms of sales, overtaking the US.”
“Only now is Tesco realising the complexity of the Chinese market and just how demanding and different the Chinese consumer is. Joining up with a local partner in CRE will help it understand China better.”