Poor old Tesco (TSCO). The supermarket's big foray into the global food business hasn't exactly gone to plan. Two years after pulling out of Japan and four months after announcing its departure from the US following the failure of Fresh & Easy, it has now emerged that Tesco is in talks with China Resources Enterprise (CRE) to merge their respective supermarkets in the People's Republic.
Tesco says the joint venture will give it the local knowledge, scale and influence it needs to make a success out of China. CRE, which is partly state-owned, will benefit from Tesco's global retail expertise and supply chain capabilities. The proposed joint venture would create a business with sales of roughly £10bn, with Tesco owning 20 per cent of the company. Its 131 stores would be combined with CRE's Vanguard business, which operates 2,986 stores across China and Hong Kong. Additionally, Tesco is expected to make a one-off cash contribution to the joint venture roughly equivalent to its typical annual capital commitment to China.
So, what does all this mean? Well, the joint venture would create China's biggest multi-format food retailer and help Tesco keep its head above water in a market that's notoriously difficult to crack for supermarkets - in the last financial year, Tesco's comparable sales there fell 1.1 per cent. Deutsche Bank reckons the business is broadly break-even, while CR Vanguard is profitable. The venture could therefore give Tesco a profitable income stream and complete access to a market without the need for considerably more investment.
The news shouldn't come as too much of a surprise either, as it harks back to statements made in April, that Tesco would take a more measured, profitable approach to growth in China, an area of "strategic importance". Jon Copestake, retail analyst at The Economist Intelligence Unit, says the deal is a win-win for Tesco as it spreads risk and will give the supermarket access to faster-growing smaller cities that it would have struggled to reach. Bear in mind that CRE has a lot of experience with these sorts of partnerships too, including a tie-up with SABMiller to grow the brewer's market share in China.
