Tesco clinches China deal

Related tags Tesco Hypermarket

Britain's biggest retail group Tesco has finally made its first
entry into the massive Chinese market, finally sealing an on-off
deal with local group Ting Hsin. The UK's leading retailer now
joins Europe's biggest (Carrefour) and the world's biggest
(Wal-Mart) in the fast-growing Chinese market.

Although China recently scrapped the requirement for foreign investors in the retail sector to have a local partner, Tesco has opted for this particular route to market as being the best way to tackle the particular requirements of the Chinese market, where western-style hypermarkets frequently cover five floors and include live animals.

Tesco has made no secret of its negotiations with Ting Hsin, although reports in the UK press back in April suggested that the talks were not progressing at a sufficiently fast rate for the British number one, fuelling speculation that the group would concentrate on building a presence in Japan rather than in China in the short term.

Whatever the sticking point in the negotiations was, it has clearly been overcome, with Tesco this week announcing that it was to form a 50:50 joint venture with Ting Hsin, sharing control of the latter's Ting Cao subsidiary.

Ting Cao operates the highly successful Hymall chain of stores in China, and Tesco will now acquire 50 per cent of Ting Cao's equity in the chain for £140 million. Hymall currently operates a chain of 25 hypermarkets with plans to open up to 10 more stores in the coming year, and is a profitable business with sales of £330 million and net profit of £5.5 million in 2003.

Although it continues to grow sales in its home market, Tesco has increasingly focused its efforts on strengthening its position as Britain's biggest overseas retailer, adding units in Japan and Turkey last year and continually adding to its network of stores in central and eastern Europe and other parts of Asia.

But China - along with the US - had always been one element missing from the group's increasingly impressive resumé, and a vital addition to the portfolio of any company with such global pretensions as Tesco.

Tesco said that Hymall's hypermarkets were mostly located in upmarket shopping mall developments, and served around 2 million customers each week. Most are located in the east, north and northeast of China (Shanghai, Hangzhou and Ningbo in the east; Tianjin, Shenyang and Dalian in the north).

The joint venture is likely to be just that, with Ting Hsin bringing its extensive local knowledge and operating expertise and Tesco taking advantage of its supply chain, product development and store operations expertise.

Observers welcomed the clinching of the long-rumoured deal. "I think it is a great move for both companies,"​ Robert Gregory of M+M Planet Retail​ told FoodandDrinkEurope.com​. "For Tesco, the benefits are obvious - it gets access to the potentially huge Chinese market, and rather than starting from scratch, the retailer instantly starts with a portfolio of 25 well-established stores.

"To have started from scratch in a country where the Tesco brand is unknown, and to get the type of store locations in good sites that Hymall has, would have proved problematic and taken time."

Gregory added: "Ting Hsin obviously wanted Tesco's expertise, global buying power, and finance to take the Hymall chain onto the next level of development. Competition in China (particularly the major cities) is intensifying fast and Hymall needs to expand and develop in order to remain a leading player."

And Gregory was also confident that the joint venture route was absolutely the right way for Tesco to approach the Chinese market. "As Tesco has shown in Thailand (where it operates Lotus stores with the CP Group) it has successful experience of hooking up with a local partner first. In Japan, it acquired an established local player and the existing local management team has been kept in place.

"By working with a local partner (or acquiring a local player), Tesco can learn valuable lessons about the market. Asia is not one homogeneous market and the Chinese market is particularly unique. In fact, there are wide differences between different regions and towns. Tesco will immediately be sharing in the knowledge and expertise that has already made Hymall a profitable business."

He added that the joint venture method also reduces the risk in case things go wrong. "The likes of Carrefour (45 hypermarkets) and Wal-Mart (31 hypermarkets) have been opening up stores organically (in conjunction with local suppliers). It is widely acknowledged that it took them some time to find the right store format and merchandise mix, and they still have occasional problems with the authorities (particularly over planning permission and the correct trading licences), as well as with local suppliers."

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