Govt OKs CRE's merger with Tesco

An outlet of Tesco in Shanghai.China Resources Enterprise Ltd announced on Thursday that the joint venture agreement it signed last year with Tesco Plc has been approved by the Chinese government. Lai Xinlin / For China Daily

China Resources Enterprise Ltd, China's largest retailer by market share, announced on Thursday that the joint venture agreement it signed last year with Britain's biggest supermarket chain, Tesco Plc, has been approved by the Chinese government.

Under the agreement, CRE will hold an 80 percent stake in the enterprise, with Tesco holding the rest. Tesco will add the 135 outlets and 19 shopping malls it currently operates across the Chinese mainland into the new venture.

The new company is intended to be developed as a multiple-format retailer operating across the Chinese mainland, Hong Kong and Macao. It will cover a variety of retail businesses, including hypermarkets, supermarkets, convenience stores and liquor stores.

Hong Jie, chief executive officer of China Resource Vanguard Co Ltd, one of CRE's main retail chains, said the 135 Tesco stores on the mainland will use the Vanguard brand name.

The new business is expected to reach 10 billion pounds ($16.8 billion) in sales, according to a company statement.

The two parties' retail resources will be used to the fullest through the deal, and the backstage management platforms of the two retailers will be integrated, said Hong.

"This deal will bring us a win-win result, as the joint venture combines the advantages of the two parties - foreign enterprise's edge in management and local enterprise's resources network in the country," Hong said.

The retail division of CRE reported revenue of HK$28.1 billion ($3.6 billion) in the first three months of the year, 8.3 percent greater than a year earlier. But net profit in the period saw a year-on-year slump of 10.3 percent to HK$471 million, according to its financial report.

The continued macro-economic slowdown, the government's austerity campaign and rapid growth in e-commerce sales all contributed to the decrease in net profit, the company said in the report.

But its main rivals experienced a similar slump. Wal-Mart Stores Inc, the world's largest retailer by sales, generated a net profit of $3.58 billion in the first quarter ending on April 30, posting a year-on-year decline of 5 percent. French Carrefour SA saw its revenue drop by 3.7 percent to $27.4 billion in the first three months, compared with the previous year.

"The combined market share of CRVanguard and Tesco in the first quarter will be 8.9 percent, slightly higher than Sun-Art Group's 8.8 percent, indicating a very marginal lead in market position over its nearest competitor," said Jason Yu, general manager of Kantar Worldpanel China, a global researcher of buying habits.

"It is crucial for CRVanguard to consolidate the Tesco operation in the east region where Tesco is stronger but suffered share losses over the past year," said Yu, adding that "the continued expansion of RT-Mart and Wal-Mart will always pose new challenges to its temporary leadership."

Li Ruxiong, chief financial officer of CRE, told a news conference in March that the group had been opening as many as 250 stores a year, but this year will be one of consolidation as it has to absorb the 135 Tesco outlets. Thus, the Chinese retail conglomerate will open stores only in mature markets this year, with the estimated number ranging from 50 to 100.

Last year, CRVanguard gained 92.4 billion yuan ($15 billion) in sales in its proprietary stores, with the number of stores reaching 3,835.