Tesco has announced it has entered into an agreement and is talks with China Resources Enterprise (CRE) to combine their Chinese retail operations to form the leading multi-format retailer in China.
China is the world’s biggest food and grocery market and is now valued at more than US$1tn and is forecast to be worth US$1.5tn in 2016, according to latest figures published by IGD (see table below).
IGD’s top 15 global grocery market ranking
Source: IGD Retail Analysis
Tesco said the new partnership would bring together CRE’s understanding of local customers, established nationwide infrastructure and proven track record as a partner with its global retail expertise, international sourcing scale and supply chain capabilities.
The proposed joint venture would create a business with sales of £10bn, in which CRE and Tesco’s effective interests are expected to be 80% and 20% respectively.
It would involve CRE combining its CR Vanguard business, which currently operates 2,986 stores across China and Hong Kong, with Tesco China’s 131 stores and shopping mall business.
Tesco said the planned partnership follows a series of successful joint ventures between CRE and other multi-national corporations and is consistent with its 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. There is no certainty that a transaction will occur, said Tesco.
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.”
Jon Copestake, retail analyst at The Economist Intelligence Unit, agreed: “These talks confirm Tesco reverting to the tried and tested method of engaging with a local partner in trying to gain a greater market penetration. In many ways the deal is a win-win situation for Tesco, with the 3,000 stores under the China Resources Vanguard brand providing the market access to faster growing smaller cities that a general retailer like Tesco craves, but would struggle to gain access to organically,” he said.
“Additionally, the deal will spread the risk of the venture between the two players and draws upon the expertise that China Resources has with local suppliers and with Chinese regulation. In many ways this is also a well-trodden path for China resources, who have also partnered very successfully with UK-listed SABMiller to grow the brewer’s market share in China substantially.
“Critics may see this as Tesco admitting defeat in attempts to tackle the difficult Chinese market on its own and spreading the risk also spreads the potential reward. But with the British retailer focused on regaining share in the UK without losing out in a key emerging market like China, engaging with a partner like China Resources seems an obvious route to take.”
Tristan Rogers, CEO of ConcretePlatform, which works with retailers on international expansion, said the news about a possible “merger” with CRE was unsurprising given Tesco’s high profile failings via wholly-owned expansion strategies recently.
“However, while this could be seen as a knee jerk response to the City’s desire to jettison loss making “assets” from the Tesco PLC balance sheet, I think this approach is a more intelligent move towards stake holdings in profitable ventures, regardless of the name above the door,” he said.
“Indeed, in the press release, the spokesperson states the merger “is consistent with Tesco’s stated strategy of focusing on profitable routes to growth in fast-growing but less mature markets”. Whilst this is hardly demonstrable of the Fresh and Easy business plan, it’s good to know the new management appreciate irony, but also tactical adjustments to their global ambitions.”