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May 20, 2013

UK/CHINA: Tesco “looking for JV partner in China”

Tesco is reportedly looking for a partner in China, a market the UK retail giant has been in for almost a decade but where it has slowed expansion in recent months.

By Dean Best

Tesco is reportedly looking for a partner in China, a market the UK retail giant has been in for almost a decade but where it has slowed expansion in recent months.

The Financial Times yesterday (19 May) reported Tesco, which has operated in China since 2004, wanted to form a joint venture to continue expanding in the country while using fewer resources.

The FT cited three anonymous sources. Tesco has declined to comment. “We have refused to comment and we have nothing further to add,” the UK’s largest retailer said when contacted by just-food today.

When Tesco reported its annual results last month, the company said it had taken “a more measured approach to our growth in China” in the last year.

Tesco, which is present in 12 markets, has over 130 stores in eastern China. Two years ago, Tesco raised CNY725m in a bond issue in Hong King to fund its expansion in China. “China is an important market for us and represents a great growth opportunity,” CFO Laurie McIlwee then said. A month later, a senior executive was quoted as saying Tesco planned to open 25 stores a year in China.

Since then, Tesco has become more cautious about its prospects in China. In the 12 months to 23 February, Tesco opened 12 outlets and closed five others as part of a focus on three regions in the country. Over the year, Tesco’s like-for-like sales fell 1.1%

“We still see an excess amount of new space being opened in the market – ahead of customer demand – and we have moderated our pace of development accordingly,” it said.

Tesco insisted China remains “a strategically important market” for the company. This year, it plans to launch an online grocery service in Shanghai.

However, Tesco appears to want to divert more resources to other markets in Asia. “In line with our efforts to move to a more sustainable balance of growth and returns, we have adopted a new approach to capital allocation between our international markets. As such, we intend to commit a greater proportion of our capital investment to Korea, Thailand and Malaysia where we have strong positions and significant potential for further growth,” Tesco said when it published its annual results last month. 

“In our European businesses, we will concentrate on holding our current market positions and improving returns. In our less mature markets – China, Turkey and India – we will focus our efforts on establishing and then pursuing a profitable approach to growth.”

Reflecting on the FT report today, Shore Capital analyst Clive Black said the market would support Tesco teaming up with a local player in China.

“The story is not confirmed but if an appropriate partner could be found it may be welcome news, helping local insight in a market that pure Western plays struggle to effectively penetrate in our view. Such a move would also assist the group’s drive to better capital discipline and we believe would be welcomed by the market,” Black said.

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