A view of a Tesco store in south London, yesterday.
LONDON: Britain’s biggest retailer Tesco agreed a major deal yesterday to create a retail giant in China, as it seeks to offset “challenging” trading conditions in Europe which hit profits hard.
Tesco will create a joint venture with China Resources Enterprise (CRE), it revealed in a statement, alongside news that first-half net earnings slumped by a third on flat revenues, restructuring costs, tough overseas markets and lower profit from property sales.
London-listed Tesco — the world’s third-biggest supermarket group after US retailer Wal-Mart and number two Carrefour of France — added that the Chinese move was part of its international strategy to tap further into fast-growing economies.
“Tesco and CRE today announce that they have entered into definitive agreements to combine their Chinese retail operations to form the leading multi-format retailer in China,” a statement said.
The companies had revealed in August that they were in exclusive talks over a deal.
Hong Kong-listed CRE will have a stake of 80 percent and Tesco will have 20 percent, but this can rise to 25 percent after five years.
“We are delighted to work with CRE to create the leading Chinese retail business,” said Tesco chief executive Philip Clarke in the statement.
“Through this deal we have a strong platform in one of the world’s most exciting markets and it will move us more quickly to profitability in China.
“This is very good news for customers and shareholders and a further demonstration of our commitment to build sustainable, profitable businesses, establish multichannel leadership in all of our markets and pursue disciplined international growth.”
The new venture will combine Tesco’s 134 Chinese branches, as well as the firm’s Chinese shopping mall business with the China Resources Vanguard business of 2,986 outlets. CRE chief executive Hong Jie said that “the joint venture brings together the individual strengths and advantages of Tesco and CRE.”
The deal would link local knowledge of customer behaviour with the best practice of an international group. The agreement would benefit both groups and would propel the internationalisation of China’s retail industry.
“The partnership will be strongly placed to lead the development of retailing in China and create value for shareholders and customers,” he said.
The deal marks the latest attempt by Tesco to transform its fortunes after last year suffering the first drop in annual profits for almost two decades.
The London-listed supermarket giant is battling weak sales in main market Britain, and over the past year decided to close its failed US division Fresh & Easy and to exit from Japan.
In another heavy blow, Tesco reported that net profits dived 33.6 percent to £820m ($1.3bn) in the first half of its financial year, or 26 weeks to August 24.
That compared with profits after taxation of £1.24bn in the same period a year earlier. Revenues rose by just 1.9 percent to £31.91bn. “The challenging retail environment in Europe has continued to affect the performance and profitability of our businesses there,” added Clarke in the results statement.