Tesco closes stores as expansion stutters

Retail giant insists further outlets to be planned in strategic locations

British retail giant Tesco Plc, the world's third-largest retailer by sales revenue, confirmed it would close four stores in China, a move to concentrate on its key business regions in the country.

Customers leave a Tesco store in Changzhou, Jiangsu province. The British retailer currently has 132 stores in China, with most of them located in coastal cities. [Photo/China Daily]

The store closures, in Bengbu, Anhui province, Tieling, Liaoning province, and Taizhou and Changshu, both in Jiangsu province, are the latest example of foreign retailers' slowing expansion in China.

The company said the store closures are to optimize its retail network in order to better serve consumers in "strategically important areas".

Tesco currently has 132 stores in China, with the majority located in coastal cities.

"It is not an easy decision, but we believe it will help us better cope with changes in the Chinese market," said a statement from the company.

"China will remain an ideal business destination and we will spare no efforts to find our right market position and capture all business opportunities".

Tesco intends to open 16 new stores in China in its financial year from March 2012 to February 2013. However, by Monday, only two of these stores had opened.

The closure of the four stores is a correction of the retailer's previous strategy that may have led to further losses, said Hua Tao, head of Shenzhen Franchise Association.

Hua said that, as a relative newcomer to China's highly competitive retail sector, Tesco lacks advantages in obtaining good locations and winning suppliers.

Tesco is not the only foreign retail giant experiencing difficulties in maintaining its growth in the nation. Wal-Mart Stores Inc, the world's largest retail store operator, also plans to slow down its expansion in China.

A report in the Financial Times said Wal-Mart is "slowing down expansion in China, Mexico and Brazil, cutting the new space it will open this year by about 30 percent".

"We'll still open new stores. However in order to improve our site selection and store design, and optimize customer shopping experiences, we made a decision earlier to moderate our growth," according to a statement from Wal-Mart's corporate affairs department.

China's economic slowdown has made retail, characterized by razor-thin margins, even more challenging.

Online retailers' booming business has also taken customers from physical supermarket retailers, Hua said.

Many supermarket chains' profit margins have fallen to 6 percent from 12 percent a decade ago, and are being further squeezed by surging rents and rising labor costs, said Huang Wenjie, managing head of Guangdong Circulation Chamber of Commerce.

Chen Lei, a retail analyst at China Galaxy Securities, said it is difficult for foreign players to compete in a vast market where the development of supermarkets is mainly on a regional basis.

He said supermarket chains are under growing pressure to find the right model to develop their business.

The traditional model relying on fast expansion to raise leverage with suppliers and therefore increase profits is no longer working amid weakening purchasing demand.

"With smaller profit margins, the more new stores they open, the higher their costs," he said.

Contact the writers at tangzhihao@chinadaily.com.cn and wangzhuoqiong@chinadaily.com.cn