Tesco expands in Japan, backtracks on China

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Tesco, Britain's leading food retailer, has this week reaffirmed
its intention of becoming a major player in the Asian supermarket
sector with the announcement of another acquisition there. But the
deal came not, as expected, in China, but in Japan, suggesting a
change of short term strategy by the company, writes Chris

Earlier last month Tesco was reported​ to be considering taking a stake in local Chinese retailer Ting Hsin International, a move which would have given it a network of 25 hypermarkets there and a solid base on which to build.

But a report in the Sunday Times​ newspaper in the UK suggested that the company was having second thoughts about a Chinese assault, at least in the immediate future. Chief executive Sir Terry Leahy told the paper that if Tesco failed to find a suitable partner by the end of 2005, the whole move into China would almost certainly be put on ice. He confirmed that talks had been held with Ting Hsin, but stressed that a deal was far from certain.

So, with Chinese negotiations stalled, the company has turned its attention to another Asian market, Japan, where it first gained a foothold last year through the acquisition of the C Two Network. C2 is to take over neighbourhood store operator Fre'c, a "small but strategic move"​ according to Tesco which would "give C2 access to stores that complement the store size and location of its existing chain"​. Fre'c's sales in 2003 were Y28 billion.

Fre'c, or Fresh and Cost to give it its full name, is not exactly a powerhouse of Japanese retailing, with 27 stores operating in Tokyo only and with a substantial debt burden, but the deal has been backed by the Industrial Revitalisation Corporation of Japan (IRCJ), a government-backed organisation which helps find solutions for ailing companies, which will ensure that Fre'c's debts are refinanced.

Tesco will in fact be the first foreign group to benefit from the expertise of the IRCJ to bail out a Japanese company, with C2 assuming Y3.0 billion of Fre'c's debts as part of the takeover. The IRCJ will ask Fre'c's creditors to write off Y7 billion in debts as part of the deal.

"Introducing C2's processed and packaged foods supply chain will deliver better value for Fre'c's customers,"​ said Tesco in a statement. "At the same time, there will be opportunities for C2 to learn from Fre'c's successful fresh food operation."

C Two-Network currently operates 82 small supermarkets and discount stores under the Tsurukame, Tsurukame Land and Foodlet Tsurukame banners, as well as four Masushin cash & carries. Its sales in 2003 reached Y21 billion.

Moving further into Japan will not necessarily be any easier for Tesco than tackling the Chinese market, but a focus on the smaller store segment could prove to be the difference between success and failure.

"Tesco only entered the notoriously difficult Japanese market in June last year, when it acquired C Two-Network, and the latest move suggests that the group is sufficiently pleased with its performance to expand further,"​ commented retail industry specialists M+M Planet Retail​.

"Unlike Carrefour and Wal-Mart, who are investing in larger store formats in Japan, Tesco has decided to focus on small supermarket and discount store formats, believing that this route will provide it with greater opportunities to expand in the future, whilst remaining popular with Japanese consumers. Indeed, both C Two-Network and Fre'c operate small supermarkets with a strong emphasis on fresh foods, so the proposed acquisition would be a good fit."

"With Tesco looking to make further acquisitions in the market as it expands its presence, coupled with a growing number of vulnerable retailers seeking rehabilitation, further deals of this kind are foreseeable."

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