Tesco insisted today (18 June) its exit from Japan will enable the business to focus on further developing its operations in the rest of Asia.
The UK retailer this morning confirmed how it would exit Japan, a decision it first announced last August.
Tesco will leave the Japanese market in two phases: the first being its formation of a joint venture with Japanese retailer AEON.
Aeon has taken a 50% stake in Tesco Japan for a “minimal sum”, the company revealed in a regulatory filing. This agreement will pave the way for Tesco to transfer full ownership of its 117 small stores operated under the Tsurakame, Tesco and Tesco Express banners to Aeon.
A spokesperson for Tesco said the retailer had decided to abandon the Japanese market because it had been unable to build a “sufficiently scaleable” business in the market, where the firm has a 0.1% market share.
“We are focusing on our other businesses in Asia,” the spokesperson said.
During the past financial year, the spokesperson revealed Tesco racked up losses of GBP25m in Japan. Tesco has agreed to invest GBP40m in restructuring its operations under the joint venture, after which time the UK retailer will have no further financial exposure to the Japanese business or its operations.
“We are exiting in this way because we believe that it is best to have an orderly exit,” the spokesperson commented. “The formation of the joint venture is best for our employees in Japan, of which there are around 1,000.”
Shore Capital analyst Clive Black suggested that the manner in which Tesco has exited the country was significant as it demonstrated the group’s credentials as a “good corporate citizen”.
“Bearing in mind that Tesco is one of the largest retailers in Asia, the group has shown that it is a reputable employer and a sound corporate citizen in the way that it has gone about exiting Japan in our opinion. Management has engaged in a sustained process to withdraw from the market, funding the residual operations through the process and keeping the Japanese team involved at all times,” he wrote in a note to investors.
Black said Tesco’s decision to exit removed a “distraction” and a “potential source of substantial capital absorption”.
“Progress with the Japanese exit is also further evidence of the greater focus and capital discipline that CEO Philip Clarke is bringing to Tesco. Whilst there is clearly much more to do, we see the agreement with Aeon alongside the cut in capital expenditure in the UK, the focus on small store development in Central Europe and the rationing of capital to Fresh & Easy in the USA until its stores are performing more robustly, as decisions that the majority of investors will welcome,” he suggested.
Shares in the group were up 0.53% to 302.7 pence at 2.51pm today.