Tesco Plans to Sell 129-Store Japanese Unit on Lack of Scale

Aug. 31 (Bloomberg) -- Tesco Plc, Britain’s largest retailer, plans to sell its 129-store Japan unit because it cannot build a “sufficiently scalable business” there eight years after entering the market.

The stores will remain open during the sale process, the Cheshunt, England-based grocer said in a statement today. Same-store sales in Japan fell 6.4 percent in the first quarter, making it Tesco’s worst-performing business in the period.

The division, which includes the Tsurakame, Tesco and Tesco Express formats, is Tesco’s smallest international retail business and just over half the stores are profitable. The retailer has invested 100 million pounds ($163 million) there since 2004 and RBS analyst Justin Scarborough estimates the assets could be sold for between 50 million pounds and 75 million pounds.

Chief Executive Officer Philip Clarke “is prepared to take a difficult position and decisive action and that can only be viewed as a positive,” Andrew Kasoulis, an analyst at Credit Suisse in London, said by telephone. He has an “outperform” rating on the stock and estimates the Japan unit had a trading loss of around 20 million pounds last year. “It also shows Clarke’s focus on driving growth and returns.”

Tesco shares rose as much as 2.5 percent in London trading, and were up 8.5 pence, or 2.3 percent, at 373.3 pence at 11:14 a.m.

Translating Formula

“What we thought we’d be able to do is take our Express format and our small supermarket format and grow it in the Tokyo area,” Clarke told journalists on a conference call. “Unfortunately its proven to be very difficult to shift consumers from the stores that they use into new ones.”

“It was more about our difficulty in getting scale because you’re competing with some extremely large Japanese retailers,” the CEO said. The company has less than half of one percent of Tokyo’s market share, where it employs just under 4,000 staff. “We are tiny,” he said. “It’s an opportunity for somebody already in the market to expand their scale.”

Tesco entered Japan with 76 stores after the purchase of the C Two-Network Co. grocery chain in July 2003. The grocer generates about a third of its revenue outside the U.K., with Asia accounting for 16.8 percent of sales last year.

Clarke said the retailer’s decision to pull out of Japan isn’t a signal that it will exit the U.S. Fresh & Easy chain. “We’ve got great opportunities in Asia in businesses where we are market-leading and I think any comparison with Fresh & Easy would be inappropriate.”

Taiwan Exit

The move out of Japan isn’t the first time Tesco has pulled out of an Asian nation. Tesco exited Taiwan in 2006 as part of an asset swap with French grocer Carrefour SA for outlets in the Czech Republic and Slovakia. The Slovak government later banned Tesco from buying the assets on the grounds that it would have given the U.K. retailer excessive market power.

Tesco’s Japan unit comprises 123 outlets in Greater Tokyo, including 30 Express stores, 76 supermarkets, 13 convenience stores and a Fresh Kitchen operation, which produces food for the business.

The retailer last year wrote down the goodwill for the Japanese assets to zero on an impairment loss, compared to 55 million pounds a year earlier, the annual report shows.

Tesco said it will now focus on its larger businesses in the region, where it has stores in India, China, Thailand, Malaysia and South Korea, its second-largest market after the U.K.

The rest of Europe makes up about 15 percent of revenue, while the U.S. Fresh & Easy business accounted for 0.8 percent of sales last year. The retailer is building shopping malls in China and leasing hypermarket space across Asia as its U.K. market share slips.

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

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net