Closing time

Within the target demographic?

Shortly after becoming chief executive of Tesco last year, Philip Clark offered a sporting metaphor to the Financial Times. It was about his strategy for the Chinese market. “For me, China is not a race, it’s not a sprint,” he told the newspaper. “If it’s a race at all, it’s a marathon.”

But that marathon is now proving tougher than Clark may have envisaged. Tesco recently announced that it is shutting down four stores in China by the end of this month, as part of a consolidation campaign. It wasn’t long ago that Tesco was talking about doubling the number of its Chinese hypermarkets to more than 200. Additionally it planned to open 50 Lifespace shopping malls by February 2016.

Now the UK retailer seems to be quietly scaling back these ambitions. Sales have disappointed and the shopping mall projects have been difficult to execute. The chain, which runs 111 supermarkets and hypermarkets in China, says the closings are designed to “improve the strategic allocation of resources”.

So what happened? Although the company does not disclose its financial performance in China, one analyst told the FT that Tesco lost an estimated £50 million in the country in the year to February 2012.

Rising shop rents and labour costs have led to lower profits, and not just for Tesco but for many retailers. According to the China Chain Store and Franchise Association, labour and rental costs for retailers grew by 26% and 10% respectively in 2011.

Analysts also say that Tesco was late into the game. When it first entered China in 2004, Carrefour and Walmart were already expanding aggressively. Even after Tesco went into more rapid expansion mode in 2009, it never caught up with its larger rivals (Walmart has 267 stores, for example).

Tesco may also have overestimated consumer spending power in smaller Chinese cities. In the last two years it targeted third and fourth-tier cities to avoid the greater competition in more developed areas. However, local spending power has disappointed. The British retailer has also had to compete with small domestic rivals, which have undercut it on price, says China Co-Operation Times.

The disappointment has led to rumours that more radical steps may be under consideration and Xinmin Evening News reported last week that state-owned food giant COFCO is in talks with Tesco to buy its Chinese operation. But Tesco says it remains committed to the China market.

“China’s retail market is very big but it is not easy to make money,” says Li Wende, general development manager of French retailer Auchan, adding that the recent replacement of the senior executive teams at a number of foreign retailers (including Walmart) in China indicates that results have displeased head offices.

Li also suggests the industry is heading towards more consolidation and there were more rumours last week that French hypermarket operator Carrefour is also interested in selling its Chinese operation. A local retail company manager told National Business Daily that Carrefour, the world’s second-largest retailer, is in discussions with China Resources Enterprise about selling up. Apparently the French firm has also spoken to Tingyi, another major food manufacturer, and COFCO. But talks went nowhere because Carrefour’s asking price was too high, says Xinmin Evening News. (Carrefour, like Tesco, also denies talk of selling its Chinese stores.)

Meanwhile, Walmart has also announced that it is having a China rethink, after admitting it had made mistakes in its haste to expand. Company executives said they’d opened stores that had proved hard for shoppers to navigate (some were configured in odd shapes). Walmart has partially scaled back its own new store ambitions too: it will open half of the new square footage it had previously planned in the country.

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