* Tesco to take just 20 pct of venture with state-run firm
* Deal may affect chances of CRE bidding for Li's
* Other foreign retailers have pulled out of China
* Tesco has also retreated from other global markets
By Denny Thomas, Donny Kwok and Neil Maidment
HONG KONG/LONDON, Aug 9 After nine years in
China, British supermarket firm Tesco is to fold its
unprofitable operation into a state-run company as a minority
partner, becoming the latest foreign retailer to give up on
trying to crack China on its own.
Lured by the prospect of a rapidly growing middle class in
the world's second-biggest economy, many foreign firms have
waded into China's retail market only to find they lack local
expertise, particularly in building supplier relationships.
The world's No.3 retailer said on Friday it was in talks to
team up with China Resources Enterprise Ltd (CRE), a
move that follows decisions to abandon the United States and
Japan and focus on investing in its British home market.
The move would cede control, with Tesco having just a 20
percent stake, but bring their combined market share close to
market leader Sun Art Retail Group Ltd.
Tesco would combine its 131 outlets with CRE's Vanguard
unit, which operates 2,986 mainly hypermarkets or supermarkets
across China and Hong Kong. The combined business will have some
10 billion pounds ($15.6 billion) in sales, dwarfing the 1.43
billion pounds Tesco generated on its own in China last year.
Retail analysts said the decision was effectively a
surrender by Tesco, showing the difficulty foreign companies
have in negotiating with suppliers and regulators in a
fast-growing but tricky market.
"This may look win-win, but in reality, Tesco is saying 'I
can't figure out China'," said one Hong Kong-based M&A banker.
"Tesco has been struggling in China and has been losing
money. Similar to Carrefour, they had issues in their home
market which they had to resolve," he said.
Tesco is expected to pay CRE a few hundred million pounds in
the deal, which would make the combined business the leading
retailer in seven of the eight highest spending areas in China.
China has proven to be conundrum for many foreign retailers.
The world's biggest and second biggest retailers, Wal-Mart
Stores Inc and French retailer Carrefour SA
are for now slugging it out alone, although there have been
suggestions that Carrefour too could be seeking a local partner.
Wal-Mart, with 380 stores, plans to open another 100 in the
next three years. Carrefour, with 70, is targeting 20 new
openings a year.
Germany's Metro AG said in January it was pulling
out of the consumer electronics business in China while Home
Depot Inc said last year it would close all seven of its
big-box home improvement stores.
"Tesco... finally finds a big giant to salvage them," said
Kenny Wu, an analyst at Societe Generale Ji-Asia in Hong Kong,
adding that the deal also works for CRE which is keen to expand
its market share and has the cash to do so.
HOME MARKET FIRST
The move follows steps by Tesco to retreat from
international expansion and focus on its British home market.
In April Tesco posted its first profit fall in two decades,
wrote down the value of its global operations by $3.5 billion
and confirmed plans to exit its loss-making business in the
United States after five years trying to crack the market.
In 2012 the firm ended a nine-year attempt to compete in
Japan's tough retail market, effectively paying Aeon Corp
, the country's No.2 general retailer, to take its
loss-making business there off its hands.
At home, where Tesco makes about two thirds of its revenues,
it is pumping 1 billion pounds into store revamps and new food
ranges to revitalise a business that lost ground to rivals and
suffered from weak demand for general merchandise, as
cash-strapped Britons cut back on discretionary spend.
In China, where Tesco makes around 2 percent of sales, the
hypermarket industry is likely to grow to 863.8 billion yuan
($141 billion) by 2015, from an estimated 659.6 billion yuan in
2013, according to Euromonitor.
"Its partner brings formidable scale and local access, so it
is hard to fault the logic of the move, even if it reads badly
for the initial gung-ho expansion into China under previous
management," independent retail analyst Nick Bubb said.
Sun Art, a joint venture between Taiwan conglomerate Ruentex
Group and privately held French retailer Groupe Auchan SA
, currently has a 13.6 percent market share in China.
CRE and Wal-Mart each have about 10.9 percent, while Carrefour
has 6.9 percent and Tesco 2.4 percent.
If Carrefour is on the lookout for a partner in China, the
Tesco tie-up may now make that more difficult to achieve.
"It does seem to close down the options for Carrefour,"
Exane BNP analyst Andrew Gwynn said. "That's not to say there
aren't other potential partners but clearly Carrefour has also
been looking for someone to help share."
The deal also comes as Asia's richest man Li Ka-shing is
considering selling his Hong Kong supermarket business, worth up
to $4 billion. Wal-Mart is considering a bid, people familiar
with matter have said, but the Tesco deal has apparently ruled
out interest from CRE, according to some bankers.
CRE shares rose 7.8 percent to HK$25.70, outpacing a 0.7
percent rise in benchmark Hang Seng share index. Tesco
shares were up 0.56 percent at 1138 GMT.
($1 = 6.1225 Chinese yuan)($1 = 0.6429 British pounds)