After nine years in China, British supermarket firm Tesco is to fold its unprofitable operation into a state-run company as a minority partner, becoming the latest foreign retailer to give up on trying to crack China on its own.
Lured by the prospect of a rapidly growing middle class in the world’s second-biggest economy, many foreign firms have waded into China’s retail market only to find they lack local expertise, particularly in building supplier relationships.
The world’s No. 3 retailer said on Friday it was in talks to team up with China Resources Enterprise Ltd (CRE, 華潤創業), a move that follows decisions to abandon the US and Japan and focus on investing in its British home market.
The move would cede control, with Tesco having just a 20 percent stake, but bring their combined market share close to market leader Sun Art Retail Group Ltd.
Tesco would combine its 131 outlets with CRE’s Vanguard unit, which operates 2,986 mainly hypermarkets or supermarkets across China and Hong Kong. The combined business will have about ￡10 billion (US$15.6 billion) in sales, dwarfing the ￡1.43 billion Tesco generated on its own in China last year.
Retail analysts said the decision was effectively a surrender by Tesco, showing the difficulty foreign companies have in negotiating with suppliers and regulators in a fast-growing, but tricky market.
“This may look win-win, but in reality, Tesco is saying ‘I can’t figure out China,’” one Hong Kong-based M&A banker said.
“Tesco has been struggling in China and has been losing money. Similar to Carrefour, they had issues in their home market, which they had to resolve,” he said.
Tesco is expected to pay CRE a few hundred million pounds in the deal, which would make the new business the leading retailer in seven of the eight highest-spending areas in China.
China has proven to be conundrum for many foreign retailers.
The world’s biggest and second biggest retailers, Wal-Mart Stores Inc and French retailer Carrefour SA are for now slugging it out alone, although there have been suggestions that Carrefour too could be seeking a local partner.
“Tesco... finally finds a big giant to salvage them,” said Kenny Wu, an analyst at Societe Generale Ji-Asia in Hong Kong, adding that the deal also works for CRE, which which is keen to expand its market share and has the cash to do so.
The move follows steps by Tesco to retreat from international expansion and focus on its British home market.
In China, where Tesco makes around 2 percent of sales, the hypermarket industry is likely to grow to 863.8 billion yuan (US$141 billion) by 2015, from an estimated 659.6 billion yuan this year, according to Euromonitor.