Britain’s biggest retailer, supermarket chain Tesco, said yesterday that it is in exclusive talks over combining its Chinese operations with those of China Resources Enterprise (CRE, 華潤創業).
The deal is seen as part of a strategy by Tesco to counter a slowing of growth in mature markets by expanding in emerging economies, and in line with a drive by China to balance export growth with domestic consumption. Tesco said the proposed joint venture would create a business with annual sales of about ￡10 billion (US$15.5 billion.)
CRE is expected to have an effective stake in the venture of 80 percent and Tesco of 20 percent.
“Noting recent media speculation, Tesco PLC and China Resources Enterprise Ltd today announce that they have entered into a memorandum of understanding and are in exclusive talks to combine their Chinese retail operations to form the leading multi-format retailer in China,” Tesco said.
The deal would involve CRE combining its CR Vanguard business, which operates 2,986 stores across China and Hong Kong, with Tesco China’s 131 stores and shopping mall business.
“The intended partnership follows a series of highly successful joint ventures between CRE and other multinational corporations and is consistent with Tesco’s stated strategy of focusing on profitable routes to growth in fast-growing but less mature markets,” Tesco said in the statement.
However, it warned the deal was subject to further work on due diligence and final terms, and there was no certainty that the deal would be completed. Tesco’s latest strategic move comes as the company battles against poorer sales in its main market, Britain.
The group, which earlier this year announced its first drop in annual profits for 20 years, is meanwhile withdrawing from its failed US division Fresh & Easy. Tesco last year announced it was shutting its Japan operations to focus on fast-expanding Asian markets.
Beijing said yesterday the country’s retail sales, a key indicator for consumer spending, rose 13.2 percent last month year on year.
China’s growth model has long been based on taking advantage of the country’s cheap and abundant labor to manufacture products for export, alongside credit-fueled domestic investment to develop infrastructure.
Beijing now says the situation is unsustainable and the growth model should be rebalanced towards consumer demand.