M&A

Checking out

UK retail giant Tesco sells out of Chinese venture

Tesco-w

Finally exited the China market

“The very presence of live wildlife in a food store is a recipe for a human health disaster of epic proportions.”

Prophetic words from the Tortoise Trust to Tesco back in 2006 when the conservation group discovered that the UK food retailer was selling live turtles and frogs at its new supermarkets in China.

In addition to spotlighting China’s “scant regard to hygiene at all stages”, the trust attacked Tesco for cruelty to creatures like turtles, which are intelligent enough to understand verbal commands. It was not alone: animal welfare groups put the company under concerted pressure with stories about turtles being suffocated in plastic bags or “dissected alive” for the delectation of Chinese shoppers eager for the freshest possible produce.

Tesco capitulated to the pressure in 2015; something that its US rival Walmart has resisted. The tale is a metaphor, not only for differences in shopping habits and attitudes towards animal welfare, but also for the difficulties that foreign retailers have often experienced trying to break into the Chinese market.

WiC has written about the retail groups that came to China with grand ambitions, only to exit in disappointment a few years later. Tesco was one of the casualties. Despite the accusations of putting profits above animal welfare, the reality is that it wasn’t making much profit at all. In 2014 this prompted it to sell an 80% stake in its operations to China Resources via the creation of a joint venture. Tesco became the junior party: its red, white and blue signage was replaced with the branding of China Resources own Vanguard supermarket chain.

The deal valued Tesco’s 20% stake at HK$4.33 billion ($556 million). Late last month it sold that stake to China Resources for £275 million ($357 million). Tesco said the exit will allow it to “further simplify and focus the business on its core operations” but it also means a writedown of 46% of the value of the joint venture over the past six years.

Like rivals such as Carrefour, Tesco first misread the local mood by building large hypermarkets. It anticipated that shoppers would arrive in cars for their ‘weekly shop’. But there were many more customers who preferred to make quick walks to their local shops or markets for fresh produce a few times a week.

The same realisation saw Carrefour throw in the towel last year. In June it sold an 80% stake in its Chinese operations to Suning.com for €620 million ($690 million) in a deal that valued the China entity at €1.4 billion including debt. The French group was suffering from soaring rents after deciding to lease the land for its stores rather than buy it (see WiC458).

Western retailers that have done better in China have taken a different tack. Walmart and France’s Auchan (which operates a mainland Chinese joint venture with Taiwan’s Ruentex Group) have forged alliances with China’s tech giants to build a more compelling online-offline strategy. Walmart sold its online shopping businesses to JD.com in 2016 in exchange for a small equity stake in the Tencent-affiliated e-commerce platform. Auchan gave up a 36% stake in it Sun Art hypermarket chain to Alibaba in late 2017.

Germany’s Aldi also dipped a toe into the Chinese market by setting up an online store on Tmall in 2017 to test shopper preferences. It opened its first physical store last June focused on branded products, sold at discount prices. The bestsellers have included wine and beer from Europe.

Another success story has been Costco, which opened its first store in Shanghai last summer. As we wrote in WiC468, the US warehouse chain has been a hit with consumers, who like the lower prices of buying in bulk, topped off by special offers in sought-after items such as bottles of Moutai’s 500-millilitre Feitian brand. Costco announced in February that it has bought the land for another store in the city, not far from Shanghai Disneyland.

Walmart is following a similar strategy, with plans to invest over $1 billion in an enhanced network of physical stores over the next six years. It is also investing heavily in Sam’s Club. Like Costco, these are membership-only clubs, that offer higher-end goods which are harder for local rivals to source.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.