Tesco has signed “definitive” deals to merge its Chinese business with local retailer China Resources Enterprise.
The UK retailer made the announcement alongside its half-year results, which included a fall in profits in part caused by lower earnings in Europe and Asia.
The agreement with CRE, which has almost 3,000 stores in China, finalises a memorandum of understanding revealed in August.
Tesco, which has 134 stores and a shopping mall business in China, will take a 20% stake in a joint venture the retailer said would be the “leader” in “seven of eight of the most populous and highest GDP provinces in China”. The venture will have sales “approaching” GBP10bn (US$16.22bn) – compared to the GBP1.34bn of sales Tesco’s Chinese business generated in its last financial year.
The UK’s largest retailer had high ambitions for its Chinese business. Entering the market in 2004, even as recently as two years ago, it launched a bond offer to fund expansion there.
However, in the year to 23 February, Tesco’s sales in China fell and, announcing its annual results in April, the retailer said excess space in the market meant it was taking a “more measured approach” to its business in the country.
Nevertheless, Tesco said China remained a “strategically important” market for the company.
On the completion of its deals with CRE, Tesco will pay HK$1bn to its Chinese partner and the same again on the first anniversary of the agreements being finalised. Tesco said it would also contribute HK$2.33bn to the venture.
“Through this deal we have a strong platform in one of the world’s most exciting markets and it will move us more quickly to profitability in China,” Tesco CEO Philip Clarke said.
“This is very good news for customers and shareholders and a further demonstration of our commitment to build sustainable, profitable businesses, establish multichannel leadership in all of our markets and pursue disciplined international growth.”
CRE CEO Hong Jie added: “The joint venture brings together the individual strengths and advantages of Tesco and CRE, a compelling combination of local customer insights and international retail best practice, creating success and value for both groups, as well as propelling the internationalisation of China’s retail industry.”
Click here and here for two comments from just-food on Tesco’s Chinese plans when they were revealed in August.