Blog: Petah MarianTesco faces tough road ahead in China

Petah Marian | 20 April 2011

While Tesco's issues in the US have stolen headlines, the retailer is also facing challenges in China. The UK's largest retailer recorded a loss in China in the second half of its fiscal year and CEO Philip Clarke announced yesterday (19 April) that it would not reach its expansion targets in the country.

The company yesterday scaled back its ambitions to build shopping malls in China to 50 in five years instead of the initially planned 80.

The retailer attributed its losses in China to financial reforms in the country and inflation levels, which, Clarke said, led customers to "tighten their discretionary spending".

On the back of this news, Clarke admitted that Tesco would have to lower its forecast to "quadruple profits" in China by 2014.

Tesco's problems in China beg the question: are they simply the cost of doing business in an emerging market, or are there deeper roots?

Verdict analyst Matt Piner and Shore Captial analyst Clive Black both feel the growing pains the retailer is experiencing are largely "to be expected".

Meanwhile, Arden Partners analyst Nick Bubb was somewhat less forgiving, saying that the fact that "the fact that was a bit off, was a bit embarrassing for them".

Piner suggested that the retailer may need to consider a new approach in the country to get around its strict development laws, arguing it may be better to set up more local partnerships or look at different store formats and different areas.

Indeed, Clarke has already said that Tesco will be considering other store options in order to relieve the pressure on missing the Lifespace malls target.

However, he added that Tesco's strategy in the country, is a "marathon not a sprint" and it would continue to look to build its stores in "prime spaces".



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