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Tesco eyeing China?

17-Mar-2004

Britain's biggest food retailer Tesco looks set to take a further step towards its goal of competing with global giants such as Carrefour and Wal-Mart with a move into the massive Chinese retail market.

Tesco is by far the most international of the UK retail chains with operations in Ireland, central and eastern Europe and throughout south east Asia, but with no presence in the US, Latin America or China it is still some way behind its main international rivals.

With a war chest of some £1.6 billion following a share placement and property sales, Tesco has the finances to support its ambitions, and it comes as no surprise that the company is reported to be in talks over the acquisition of a stake in a leading Chinese retail group.

 

According to a report in the Financial Times, Tesco is looking to take a 50 per cent stake in Ting Hsin International, a group which operates 25 hypermarkets in China under the Hymall and Le Gou banners, at a cost of around $200 million.

 

Chinese law states that foreign companies operating there must have a local partner, and buying into existing retail businesses is the traditional method employed by western groups seeking a foothold in the Chinese market.

 

The report suggests that a deal could be finalised very soon.

 

In fact it is widely thought that Tesco has been looking for an opportunity to get a foothold in the China market for some years, but that it has had problems finding a suitable joint venture partner. However, the government is said to now be considering softening its stand on required partnerships for the retail sector, which in turn could lead to a flood of foreign retailers joining the market in the future.

 

While planning restrictions in the UK mean that Tesco's domestic business in predominantly in the supermarket sector - its recent drive into convenience stores notwithstanding - the group prefers to use the hypermarket format to drive its expansion into other markets - making Ting Hsin an excellent partner.

 

Asia is becoming an increasingly important region for the group, which has 79 stores there, predominantly in Thailand and South Korea, although it also operates in Taiwan, Malaysia and, most recently, Japan. But China is a different prospect altogether, not least because of the sheer size of the country and the fact that almost all retail development there to date has been in the eastern coastal region near Beijing and Shanghai.

 

Carrefour became one of the first western groups to move further into the interior earlier this year, opening a store in the northern city of Urumqi, and a relaxation of the rules on market entry later this year (part of China's commitment to the World Trade Organisation) could lead to a rapid drive into the more remote - and less densely populated - areas of the country.

 

Carrefour certainly has plans to step up its presence in China this year, with some 12 new openings planned, taking its total store portfolio to around 55. With a 25-store presence through Ting Hsin and a local partner with considerable experience, Tesco would be in a strong position to catch up with rival players and continue its rise up the global retail rankings.

 

At the other hand of the spectrum leading US-based retailer Walmart has also been highly reluctanct to enter the China market. The company currently has a modest 33 stores with annual revenues of $409 million. However, where it has chosen to really make big roads into the Chinese markets is for the sourcing of goods for its global operations, which currently amounts to $10 billion.

 

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