After several years of sniffing around the mainland Chinese market, it seems that Tesco, the UK’s largest food retailer, is preparing to make a move. Paul French reports from Shanghai.

Although no official statement has yet been made, Tesco is rumoured to be considering spending some US$200m on a 50% stake in 25 mainland hypermarkets – ten of them in Shanghai – owned and operated by Ting Hsin International Group of Taiwan.

Despite its cautious approach to China, Tesco is no stranger to Asia. Constrained by regulatory controls from expanding aggressively in its home market – where it now enjoys a legal maximum 27% market share – the company has opened stores in growing markets across the region. To date, there are 79 Tesco stores in Japan, Malaysia, South Korea, Taiwan and Thailand, generating US$3.8bn out of its global revenue of US$53.1bn in the year up to this March, according to company statements. This proportion should climb further in the wake of Tesco’s purchase of C Two-Network, a Japanese convenience-store chain, for US$220m in July 2003.

Forging new territory

While Tesco is understood to be keen to be the first UK food retailer to enter the mainland China market, its motives do make strong business sense. The emergence of modern trade – chainstore operations in hypermarket, supermarket and C-store format – as an increasingly dominant segment in China’s fast-changing retail environment not only reflects the fragmentation of the market but also the enthusiasm of (mainly urban) consumers for more attractive shopping environments.

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Yet Tesco should have no illusions about the challenges it faces. Major international players Carrefour of France and Wal-Mart of the US have already set up mainland operations and are investing heavily in further expansion.

Since entering the mainland market in the mid-1990s, Carrefour has cleverly beaten off local competition and protectionism to become the country’s fifth-largest retailer – even by the conservative estimates of the Ministry of Commerce (Mofcom). To date, the company has 41 stores around the country with sales of RMB13.4bn ($1.6bn) according to company data. What’s more, it aims to add another 30 stores this year alone.

Wal-Mart has shown a more cautious approach to retailing in mainland China. Although the world’s largest retailer now sources goods worth some $10bn on the mainland for its global operations, the company has only recently started expanding its retail presence. To date, Wal-Mart has 33 stores with revenues of RMB5.8bn in 2003.

Learning lessons from others

Tesco may well be a little daunted, but it needn’t necessarily worry. The retailer will have learnt valuable lessons from previous failed attempts by other major players such as Royal Ahold of the Netherlands, which launched in China in the early 1990s on a mid- to premium-level, only to discover that its target segment did not yet exist.

The climate is ripe

If Tesco does take the long-awaited plunge, it will also find that it has China’s regulatory environment on its side. China’s obligations to liberalise its retail sector in line with World Trade Organisation (WTO) protocols mean that as of December this year, all geographical and investment restrictions on retail operations on the mainland will be lifted – while Wal-Mart and Carrefour will be working hard to transform joint-venture (JV) operations into wholly foreign-owned enterprises (WOFEs).

Then there are the consumers. Over the past five years, China’s new middle classes have burst on to the urban scene, transforming the way people shop and providing a much-needed fillip to consumer spending. Younger urban consumers are particularly enthusiastic about the modern trade retail format, which they see as western, innovative and suitable for their lifestyles. Urban spending down China’s eastern seaboard is driving retail sales, which rose 10% year-on-year to a very healthy RMB 2.9 trillion in 2003, according to the National Bureau of Statistics (NBS). If it gets it right, Tesco could fast become a household name in China.

Paul French is the Shanghai-based Publishing & Marketing Director of research publisher and business information supplier Access Asia.

Click here to view Access Asia’s research reports.

Expert Analysis

Tesco Company Profile

Addressing all the key issues that confront the food retailing sector, this profile analyses Tesco’s changing company strategy, financial performance, new product & service development and M&A activity.

There is also an assessment of Tesco’s existing e-commerce strategy, as well as a separate section outlining’s considered view of its future