Tesco China store

Tesco is in talks to merge its Chinese operation with local retailer China Resources Enterprise

Tesco today announced a major re-think of its international strategy, after revealing it was going into partnership in China with the country’s leading multi-format retailer.

The Memorandum of Understanding with Hong Kong-listed China Resources Enterprise (CRE) will form a business worth £10bn, with Tesco holding around 20%.

The retailer said its move, which follows a recent fall in sales in China, would allow it to achieve scale in the country but with a “disciplined” approach to capital, as it continues its policy of concentrating on its UK turnaround.

Yesterday the retailer admitted its UK store programme was likely to exceed the £1bn already earmarked as it unveiled a new hypermarket format in Watford.

The China move follows its decision to quit the US, where it is negotiating the sale of the Fresh & Easy chain.

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Tesco China currently operates 131 stores and shopping malls in China, compared to CRE’s network of 2,986 stores across China and Hong Kong.

“The partnership would bring together CRE’s deep understanding of local customers, established nationwide infrastructure and proven track record as a partner with Tesco’s global retail expertise, international sourcing scale and supply chain capabilities,” Tesco said in a statement this morning.

It said the intended partnership followed a series of highly successful joint ventures between CRE and other multi-national corporations and was consistent with Tesco’s stated strategy of “focusing on profitable routes to growth in fast-growing but less mature markets, with a disciplined approach to the allocation of capital”.

The transaction is subject to further due diligence and agreement of final terms. Under the plan, Tesco’s shops would be merged with CRE’s Vanguard stores, which were established in 1999 and cover 24 provinces with a combined population of approximately 1.1 billion people.

“The Tesco proposed joint venture is part of the strategy to retrench from international operations”

Tarlok Teji, Manchester Business School

Tesco, in contrast, despite growing its footprint in China from 56 stores five years ago, is present in only nine provinces, mostly concentrated in the Shanghai, Tianjin and Liaoning provinces. 

Tesco China also includes the Lifespace shopping mall business, with six malls currently operational and further schemes under development.

In its most recent trading update, Tesco warned that like-for-like sales were down 4.9% in China.

China, the world’s biggest food and grocery market, is now valued at more than US$1tn and is forecast to be worth US$1.5tn in 2016, according to recent figures published by IGD.

“The Tesco proposed joint venture is part of the strategy to retrench from international operations,” said retail analyst Tarlok Teji. “Tesco were pretty successful in China compared to other UK retailers such as Marks & Spencer.

“The CEO is right to give more attention to the UK operations but wrong to be pulling out of overseas ventures. There is no growth in UK retailing. Any growth is forecast to come from international expansion or mobile retailing. Any effort in the UK will cannibalise sales from their own store network or from competitors.”

Nick Miles, senior retail analyst for IGD, said: “This potential deal would create a powerhouse in Chinese grocery retailing – the resulting joint venture would have over 3,000 stores and annual sales of around £10bn.

“It’s a great opportunity for Tesco to combine its international experience and supply chain knowhow with CR Vanguard’s local expertise and huge Chinese store network.”