CRE, Tesco explore retail joint venture

Tesco Plc, a leading international retailer, announced on Friday that it would set up a joint venture (JV) with China's State-owned supermarket operator, a move analysts said would reduce the risk and costs of Tesco's expansion in China.

The two sides have signed a Memorandum of Understanding and are currently involved in talks.

According to a joint press release issued on Friday, China Resources Enterprises Ltd (CRE) will control the JV with an 80 percent stake, while the other 20 percent will be held by Tesco.

The combined entity will include Tesco's 121 stores and shopping malls in the Chinese mainland as well as CRE's 2,986 stores, branded as "CR Vanguard", throughout the mainland and Hong Kong.

Analysts said that this partnership is likely to benefit both sides.

Upon the integration of the two's edges, the JV is expected to "create a business with sales of some 10 billion pounds ($15.5 billion)," said the statement posted on the two companies' websites.

"CRE could get global expertise on hypermarket operation from Tesco, the world's No.4 retailer," Zhang Wenze, an independent Beijing-based industry insider, told the Global Times Sunday.

Meanwhile, Tesco could also benefit from CRE's good understanding of local customers and well-established infrastructure, furthering its expansion in the Chinese market while cutting down on costs and taking less risks, said Zhang.

"As the retail industry in China is sluggish and consumer demand is weak, lowering operating costs is a common goal. Cooperation is a good choice to achieve this," Yan Qiang, a partner of Beijing Hejun Consulting, told the Global Times Sunday, adding that other competitors should follow the example of Tesco and CRE.

But Yan also expressed his concern whether the "Tesco" brand could be reserved in China, as its supermarkets business in the market will come under the CRE banner. He predicted that Tesco's present stores would be rebranded as "CR Tesco."

A PR representative with Tesco China, who wished to remain anonymous, refused to comment on this when contacted by the Global Times, saying that the cooperation is still under negotiation and more details will be released at the right time.

Many foreign retail companies have been seeing sales decline in the Chinese market since 2012, with several closing stores.

According to a financial report released in April, Tesco's sales in China increased by 1.1 percent year-on-year during the fiscal year ended February 23, 2013, compared to a 4.1 percent growth rate over the same period in the 2011-12 fiscal year. The company closed five under-performing stores in the duration and closed another in May.

According to a list issued by UK-based market research firm Kantar Worldpanel in July, Hong Kong-listed Sun Art Retail Group and CR Vanguard ranked first and second respectively in the Chinese market by sales volumes during the second quarter, while Wal-Mart was in second place over the same period of one year earlier.