Tesco is bringing its nine-year solo venture in China to an end at a cost of up to £1.5bn making it the grocer's latest aggressive international expansion to unravel.
The world's third largest supermarket is in negotiations with China's biggest retailer, state owned China Resources Enterprise, to create a joint venture where Tesco's 131 stores in the country would merge with CRE's 2,986 sites under the Vanguard brand.
Tesco is expected to pay millions in fees for the deal, which will leave it with a 20% stake, however, it means the Tesco name is likely to disappear from the country all together following integration.
Both sides are understood to have been in talks since before Tesco's full year results in April where chief executive Philip Clarke said the company would take a "more cautious" approach towards China.
Three years ago, in his previous role as head of international, Clarke had unveiled plans to open 80 vast shopping malls, all including a Tesco hypermarket, across China that would have made its retail portfolio bigger than the UK.However, following the disastrous withdrawal from its ill-fated US Fresh & Easy venture which cost £1.8bn, Clarke has refocused his attentions on the UK and reining back excessive spending on expansions.
It is not known how much Tesco has spent on its Chinese venture so far, however, former chief executive Sir Terry Leahy revealed in 2010 that the company planned to spend £2bn in the country by the end of 2015.
In its most recent quarterly trading update the company revealed that like for like sales in China had fallen 4.9% and that sales fell in every international location except Malaysia and Hungary.
The memorandum of understanding with CRE is unlikely to see any deal completed until next year, but if successful it would create a business with annual sales of £10bn.
Analysts generally welcomed the move, saying Tesco was unlikely to become a serious national contender without investing billions of pounds more into the country.
Mike Tattersall, retail analyst at UBS, said: "It's a pretty sensible transaction all round. Tesco has a sub-scale business in China. To achieve scale and profitability they would need to spend a lot of money, billions more.
"That does not fit with the current strategy of the group which is all about cash generation and fiscal responsibility."In the development of a market like China consolidation is a natural progression. It's not the embarrassing retreat that happened in the US. They got the business where they wanted it to be without spending lots of money."
The entrenchment is the latest by Tesco this year, after it pulled out of the US and Japan, although it has had some success in the far east, with South Korea and Thailand both performing well.
The plans for a US sale continues, but so far no buyer has emerged and there are now suggestions that the only viable option may be to shut down the operation.
According to Tesco's website, China still remains "strategically important". The grocer opened 12 new hypermarkets last year, and is due to launch an online groceries business in Shanghai later this year.However, Tesco has struggled to win over Chinese customers. Last year sales dropped 1%.
Other British retailers have also struggled in China in recent years. B&Q attempted a solo expansion into China in 1999 which was initially successful, but eventually led to the company cutting half its number of stores after years of losses.
Marks & Spencer, which has stores in Shanghai, had a disastrous initial launch after the company shunned local knowledge and hoped to copy the same model as its Hong Kong stores. The business is now improving.
Tattersall explained the difficulties with expanding into China: He said: "The problem with China is how attractive it is. It's so big and it's long term pot is so large that all the international retailers are looking at the same metrics. All the lights go green and they all pile in at the same time. Everyone is throwing capital at it so you have more and more competitors at the same time. Like-for-like growth is very difficult to come by and gross margins are tough.
"Inflation is high so from a food retailer's perspective, you have to pay a lot in wages, which is going up at double digit rates too."
The world's third largest supermarket is in negotiations with China's biggest retailer, state owned China Resources Enterprise, to create a joint venture where Tesco's 131 stores in the country would merge with CRE's 2,986 sites under the Vanguard brand.
Tesco is expected to pay millions in fees for the deal, which will leave it with a 20% stake, however, it means the Tesco name is likely to disappear from the country all together following integration.
Both sides are understood to have been in talks since before Tesco's full year results in April where chief executive Philip Clarke said the company would take a "more cautious" approach towards China.
Three years ago, in his previous role as head of international, Clarke had unveiled plans to open 80 vast shopping malls, all including a Tesco hypermarket, across China that would have made its retail portfolio bigger than the UK.However, following the disastrous withdrawal from its ill-fated US Fresh & Easy venture which cost £1.8bn, Clarke has refocused his attentions on the UK and reining back excessive spending on expansions.
It is not known how much Tesco has spent on its Chinese venture so far, however, former chief executive Sir Terry Leahy revealed in 2010 that the company planned to spend £2bn in the country by the end of 2015.
In its most recent quarterly trading update the company revealed that like for like sales in China had fallen 4.9% and that sales fell in every international location except Malaysia and Hungary.
The memorandum of understanding with CRE is unlikely to see any deal completed until next year, but if successful it would create a business with annual sales of £10bn.
Analysts generally welcomed the move, saying Tesco was unlikely to become a serious national contender without investing billions of pounds more into the country.
Mike Tattersall, retail analyst at UBS, said: "It's a pretty sensible transaction all round. Tesco has a sub-scale business in China. To achieve scale and profitability they would need to spend a lot of money, billions more.
"That does not fit with the current strategy of the group which is all about cash generation and fiscal responsibility."In the development of a market like China consolidation is a natural progression. It's not the embarrassing retreat that happened in the US. They got the business where they wanted it to be without spending lots of money."
The entrenchment is the latest by Tesco this year, after it pulled out of the US and Japan, although it has had some success in the far east, with South Korea and Thailand both performing well.
The plans for a US sale continues, but so far no buyer has emerged and there are now suggestions that the only viable option may be to shut down the operation.
According to Tesco's website, China still remains "strategically important". The grocer opened 12 new hypermarkets last year, and is due to launch an online groceries business in Shanghai later this year.However, Tesco has struggled to win over Chinese customers. Last year sales dropped 1%.
Other British retailers have also struggled in China in recent years. B&Q attempted a solo expansion into China in 1999 which was initially successful, but eventually led to the company cutting half its number of stores after years of losses.
Marks & Spencer, which has stores in Shanghai, had a disastrous initial launch after the company shunned local knowledge and hoped to copy the same model as its Hong Kong stores. The business is now improving.
Tattersall explained the difficulties with expanding into China: He said: "The problem with China is how attractive it is. It's so big and it's long term pot is so large that all the international retailers are looking at the same metrics. All the lights go green and they all pile in at the same time. Everyone is throwing capital at it so you have more and more competitors at the same time. Like-for-like growth is very difficult to come by and gross margins are tough.
"Inflation is high so from a food retailer's perspective, you have to pay a lot in wages, which is going up at double digit rates too."
