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2013-08-13

China Tough Nut to Crack
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Big companies have no choice but to adjust strategies.

After admitting defeat earlier this year in the United States, Britain’s leading retailer Tesco now looks set to abandon a 10-year bid to build an independent business in the world’s biggest market for food and groceries.

Tesco, the world’s third largest retailer after Wal-Mart and France’s Carrefour, said it was planning to transfer its 131 stores and shopping mall business in China to a joint venture with state-run China Resources Enterprise – one of the country’s biggest operators of big-box stores.

The joint venture would have combined sales of about £10 billion. Tesco revenues in China, where it first opened in 2004, total about £1.4 billion annually.

Slowing economic growth and fierce competition in a highly-fragmented market have made it difficult for some big international retailers to make money, despite the promise of higher consumer spending by China’s growing middle class.

If the Tesco deal goes through, it will hold a 20% stake in the new company, with CRE taking 80% in return for its 3,000 Vanguard stores across China and Hong Kong.

Earlier this year, German retail giant Metro said it was closing its consumer electronics business in China — operated as a joint venture with Foxconn Technology Group – to focus on developing its wholesale business in the country.

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Tesco said the plan was consistent with its strategy of focusing on turning a profit in fast-growing markets. In Asia it has been giving priority to countries such as Thailand and Malaysia.

Analysts estimate that the company invested £2 billion in building up its money-losing China business. Same-store sales sales fell 1% last year, a decline that accelerated in the first quarter of Tesco’s 2013-2014 fiscal year.

“If confirmed, Tesco would exchange full ownership in a sub-scale, heavily loss-making operation with an investment into a profitable vehicle,” noted analysts at Jeffries International.

The market leader in Chinese big box stores is Sun Art, which is rapidly becoming known as the Wal-Mart of China. Sun Art is a Taiwanese-French joint venture, providing a powerful combination of local market knowledge with international expertise – an approach Tesco and CRE will hope to replicate.

Our Thoughts

One of the key things to learn is that you can’t underestimate local knowledge. We’ve seen it time and time again with companies like Best Buy and Marks and Spencer. But more importantly, the challenge will lie within who can support local knowledge with objective market data in the most efficient way.

As Tesco and CRE follow in Sun Art’s footsteps, the competition will come down to their strategies of optimizing their store networks since both CRE and Sun Art are fairly developed in the market.

Although China is a ‘tough nut to crack’, it doesn’t mean the market is impossible. It just takes a little more thoughtful planning and analysis to support your decisions whether you attack the market alone or with a strategic local partner.

And just partnering up with a local company doesn’t mean going on local knowledge alone is enough to succeed.