Tesco's Clarke Says China Will Be Profitable Under His Tenure

Tesco Plc Chief Executive Officer- designate Philip Clarke said China will become profitable for the retailer during his tenure as the company invests 2 billion pounds ($3.1 billion) into developing shopping malls.

“My view now is China is one of the most important markets for us,” said Clarke, 50, who plans to spend about 85 working days a year abroad when he takes over from Terry Leahy in March. “The growth opportunities in the U.K. are still there, but in Asia you can carry on building a very significant number of stores for a very long time.”

Tesco is playing catch-up in China to Wal-Mart Stores Inc. and Carrefour SA, which entered the country almost a decade earlier. The U.K. company will develop 80 five-story Lifespace malls, complete with movie theaters and restaurants, in the next five years in China, open as many as 20 hypermarkets annually and is testing a convenience store format in Shanghai.

Under Clarke, who was appointed international head in 2003, Tesco has stepped up expansion overseas after Leahy built it into the U.K.’s biggest retailer. Cheshunt, England-based Tesco entered China in 2004, the U.S. in 2007 and counts South Korea as its second-biggest market after the U.K. Tesco is also on a shortlist of buyers for some Carrefour stores in Southeast Asia, three people familiar with the matter said Sept. 9.

“Certainly China is expected to be the next Korea in terms of contribution to the group and in terms of size within the group,” said Andrew Kasoulis, an analyst at Credit Suisse in London. Tesco made 440 million pounds trading profit last year in Asia, where it gets about 12 percent of sales, it said in April.

Chinese Growth

Tesco is also unprofitable in the U.S. In April, the retailer said its loss in the country wouldn’t be much lower in the current fiscal year than the 165 million-pound trading loss last year.

International retailers have an opportunity to grab sales in China, where Planet Retail estimates grocery retail sales will hit $969 billion this year. Modern shops like hypermarkets account for about 3 percent of the total market, with the remainder of food being sold at so-called traditional or wet markets and in independent shops, it estimates.

For the U.K., where the grocer generates more than 70 percent of revenue, Tesco in June forecast same-store sales growth of 3 percent in the current fiscal year. Total Chinese retail sales growth advanced 18.4 percent in August. Tesco doesn’t break out sales or profit in China.

Opening Stores

Clarke said the stores are profitable on their own.

“If we withdrew the investment in capability we’d be making money now, but we’re trying to build a business for the long-term,” he said. “So it’s going to be profitable during my tenure, I’ve no doubt about that at all, but it is going to have to be sustainable profitability.”

The company is using its cash as well as selling and leasing back some of its U.K. stores to fund the expansion in China. It plans to open another 9 this year.

In China, the grocer has 82 hypermarkets, 11 convenience outlets and three Lifespace malls. At the shopping centers, Tesco rents space to restaurants, movie theaters and other shops while hawking its own goods over two floors of grocery and non- food space.

The strategy of building malls gives Tesco more control over the smaller retailers who surround its hypermarkets, removes the threat of not having leases renewed and means it controls the building standards, Tesco China CEO Ken Towle said in a separate interview.

Qinhuangdao

The company’s largest mall in China, a 400,000-square foot (37,161 square-meter) mall in the summer resort town of Qinhuangdao, has attracted a quarter of million visitors a week since opening in February.

The Tesco store features grocery products displayed with a “market” atmosphere as employees call out the price of live crabs in ice buckets and chicken feet, while the shelves offer packets of flavor-enhancer MSG, or monosodium glutamate and Tesco own-brand “Value” lines such as soya bean oil. The company also sells non-food items like rice cookers and its Florence & Fred clothing line.

Across China, Towle says Tesco shoppers make 4.5 million transactions a week. The U.K. currently records around 20 million a week.

“The investment cycle will continue for a long time and so the maturity will go on for a long time,” Towle said. Tesco defines maturity as when a store reaches average like-for-like sales growth for a country.

India, Korea

Tesco is developing the malls through joint parterships. The first three malls in Anshan, Fushan and Qinhuangdao were part of a project with Asian investors including HSBC Nan Fung China Real Estate Fund, Singapore’s Metro Holdings Ltd and Hong Kong’s Nan Fung Group. Tesco partners will spend another 2 billion pounds in the next five years to develop malls.

Tesco is also stepping up expansion in other Asian countries. In India, Tesco plans to start a cash-and-carry business next year and, as part of a franchise agreement with Tata Group’s retail arm, will provide products and retail expertise to up to 50 Star Bazaar hypermarkets. India has “good prospects” but is “probably for the next decade, not this decade,” Clarke said.

In South Korea, where Tesco operates 226 convenience stores, local Chief Executive Officer Seung-Han Lee has started franchising the Homeplus Express format. The model helps to quell opposition from smaller, independent store operators by offering them employment. Tesco has opened 18 of the outlets in the country this year. Tesco may consider replicating the franchise model in other countries, Clarke said.

After “thirteen years in Asia, we’ve built a very significant business and it’s got such terrific growth prospects,” Clarke said.

To contact the reporter on this story: Sarah Shannon in London at sshannon4@bloomberg.net.

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