Tesco makes foray into China market
By Jiang Jingjing (Business Weekly)
Updated: 2004-07-29 10:32

A market rumour lingering over China's retailing sector eventually proved to be true.

Tesco Plc, the largest British chain retailer, spent US$260 million on a 50 per cent stake of Taiwan-based hypermarket operator Hymall, US$60 million higher than what the rumours said.

Tesco declined to comment on whether the deal was worthwhile, but the firm's Chief Executive Sir Terry Leahy said Hymall can provide Tesco "an excellent store base".

"It is a tremendous business opportunity for us to acquire Hymall's half stake, a profitable local business with good management," Leahy said.

Tesco announced earlier this month it has signed an equal partnership joint venture agreement with Ting Hsin, for its wholly-owned Ting Cao subsidiary, which owns 25 Hymall hypermarkets in China.

The transaction is expected to be completed within four months. Another ten stores will be opened up in the coming year.

According to Tesco's statement, establishment of the joint venture marks its first foray into China, a market the firm has been studying for years.

As for the name of stores, the firm declined to say if it is going to maintain the name of Hymall or use its own name, but insiders say Tesco would never give up its ambition to open stores on its own.

"The co-operation is only a key for Tesco to enter China. The firm will definitely open stores under its own name, just as what Carrefour and Wal-Mart have done," said Wang Yao, director of China General Chamber of Commerce's information department.

He said mergers and acquisitions are effective tools for foreign giants when they first enter China where fierce competitions exist in the sector.

Merging Hymall's existing 25 stores will shorten the distance between Tesco and other foreign retailers. In addition, Hymall can offer valuable experiences in local operations to Tesco, which the latter desperately needs, Wang said.

Compared with its mainland counterparts,Hymall has relatively more advanced management methods, which also is a factor in Tesco's choice, he added.

Hymall, on the verge of expanding its mainland operations, expects the strategic partnership will bring new management expertise and technology, giving new incentives to its business, said Ting Hsin's Chairman Wei Ying-Chiao.

The deal, experts believe, will initiate a trend of faster acquisitions of local stores by foreign retailing giants in a bid to win more market share.

Wang said most of the existing foreign retailers which entered China in the early 1990s started businesses through their own operation and management.

The hypermarket sector needs chain operation. Generally speaking, opening more outlets makes the hypermarkets more competitive due to the cost-savings in consistent management, supply chains and market promotions, Wang said.

"In order to be the market leader, they (foreign retailers) have to take short-cuts such as mergers and acquisitions," he said.

Carrefour, which entered China in 1992 and has 49 stores in the country, welcomed the newcomer.

"Carrefour gives a big hand to new players in the retail sector, as everyone can improve themselves through competition," said Carrefour's public relations manager Xia Ying.

Xia also added that she did not think Tesco's entry would have much impact on Carrefour.

"We have been successful in terms of localization," Xia said.

"Tesco has a lot to learn before it is familiar with China's economic situation, consumption habits, culture and even religion," Xia said.

But Tesco seems to be confident about its future in the country.

"China should not be too hard a nut for Tesco to crack," said the firm's spokesman Steve Gracey.

He said its abundant overseas experience will help it hold a firm position in the world's most populous country.

Tesco operates 2,318 outlets in 12 countries, with 179 stores in Asia including Thailand, South Korea, Malaysia and Japan.

The spokesman added Tesco opened 78 outlets in Japan within two and a half years.

Experts predict more foreign retailers will enter China this year, as the country, in accordance with its commitments to the World Trade Organization, will lift regional limitations set on foreign chain retail operators by year's end.

With all restrictions expected to be abolished by 2007, China's chain retail market will be fully liberalized.

Tesco had a turnover of US$62.19 billion in the last fiscal year, with its profit of US$3.17 billion.

Hymall has been maintaining a profitable business in recent years. Last year its revenues hit US$613 million and profits after tax reached US$10.1 million. This year's revenues are projected to exceed US$833 million.

Hymall's outlets are located in Shanghai, Hangzhou, Ningbo, Tianjin, Shenyang and Dalian.

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