Tesco’s China Joint Venture Offers Model to Revive Turkey Unit

Tesco Stumbles With Wal-Mart as China Shoppers Buy Local
Shoppers enter and exit a Tesco Plc store in Dandong, China. Photographer: Nelson Ching/Bloomberg

Tesco Plc’s new strategy in China may provide a model for the U.K.’s biggest grocer to fix its declining business in Turkey, where it has operated since 2003.

Tesco entered China a year later and yesterday announced it will fold its 131 hypermarkets in the country into the empire run by China Resources Enterprises Ltd. and retain a 20 percent stake in the business.

That “could be a blueprint for Turkey,” said David Gray, an analyst at Planet Retail in London, while noting the challenges of finding a partner in the country. The China deal “fits in with the focus on retrenchment in markets where they have low market share and joining with a local partner is always a good idea.”

Tesco has said it will leave the U.S. after years of losses there. The U.K. retailer is exiting international markets after almost two decades of expansion into central Europe, Asia and the U.S. took the focus off its home market, which accounts for about two thirds of sales. Turkey was its worst performer in the first quarter ended May 25 with same-store sales down 16 percent, after a 10 percent drop in the previous three months.

Tesco advanced 1.6 percent to 375 pence in London yesterday. China Resources shares rose 7.8 percent to HK$25.70 in Hong Kong, the biggest jump in almost a year.

Capital Discipline

Sales fell at eight out of Tesco’s 10 international businesses in the first quarter and international trading profit slumped 22 percent to 990 million pounds ($1.54 billion) in the 12 months ended in February.

After the U.S., “China and Turkey are the big question marks in Tesco’s international portfolio,” said Andrew Gwynn, an analyst at Exane BNP Paribas in London. “I’m not entirely sure a similar deal would work with Turkey but it would show real capital discipline if Tesco were to pull out. It’s an exceptionally difficult market.”

Tesco’s Kipa business in Turkey has about 191 stores, with revenue of 745 million pounds. Gwynn estimates that Kipa had a loss of about 20 million pounds last year.

The company said in 2011 that its Turkish market share was less than 2 percent. Bloomberg Industries analyst Charles Allen estimates that it has not grown significantly in the intervening period.

Tesco’s Turkish pricing and promotional strategy “wasn’t quite right” in the first quarter, Chief Executive Officer Philip Clarke said June 5, causing the grocer to lose ground to market-leading discounter Birlesik Magazalar A.S. A shift by Turkish shoppers toward local stores also means hypermarkets “are currently not the strongest performers,” Clarke said at the time.

Fast-Growing Markets

The China agreement would allow Tesco to maintain a presence in the world’s second-largest economy where it’s been closing stores amid competition from regional rivals such as Sun Art Retail Group Ltd.

The proposed China deal “is consistent with Tesco’s stated strategy of focusing on profitable routes to growth in fast-growing but less mature markets, with a disciplined approach to the allocation of capital,” Tesco said in today’s statement.

The U.K. retailer’s joint venture with China Resources Enterprise will also run supermarkets, convenience stores, and other outlets in China, Hong Kong and Macau.

“Such an arrangement keeps Tesco exposed to the fast-growing Chinese market, but allows the company to expand in a much more capital-light way,” Barclays analysts, including James Anstead, wrote in a note to investors. “This will likely be welcomed by investors who typically believe Tesco needs to take better control of its capital spend.”

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