Tesco stumbles with Wal-Mart as Asia shoppers prefer to buy local

Chinese shoppers visit the new Tesco store in Beijing, China, on Saturday, January 27, 2006.

Chinese shoppers visit the new Tesco store in Beijing, China, on Saturday, January 27, 2006.

Published Oct 21, 2012

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Tesco this week is trying to lure Chinese shoppers with promotions on soy sauce, cooking oil and apples. Emily Zhang still won’t do much of her shopping there.

The 30-year-old Shanghai resident buys most of her produce at an informal market close to home where daily supplies are fresh, the location convenient and friendly vendors throw in the occasional cooking tip.

Shoppers such as Zhang are pushing Tesco to shut Chinese outlets and open new ones more slowly two years after announcing plans to double stores and build more 37 161.22m2 malls.

Hindered by the country’s slowest economic growth since the 2009 financial crisis and competition from local markets and regional chains, the England-based retailer’s China same-store sales declined 1 percent in the second quarter.

Tesco’s China pullback reflects the hurdles global big box retail chains face in Asia, where the realities of complex local markets and slowing economies are damping dreams of easy expansion. The world’s largest retailer, Wal-Mart Stores, is also adding outlets more gradually than it had planned in China’s 3.5 trillion yuan (R4.8 trillion) grocery industry.

Carrefour is closing shops in Singapore after failing to overtake domestic competitors. Same-store sales at Carrefour, the second-largest retailer, slipped 6.1 percent in China in the third quarter, excluding currency swings, and declined by 3.1 percent in Asia, it said this month.

“It’s more of a marathon than a sprint,” said Philip Clarke, Tesco’s chief executive, referring to China. “Many retailers putting down more space in the market; few seeing that translate into profitable growth.”

An Indian lawmaker has written to Prime Minister Manmohan Singh’s office, questioning whether Wal-Mart violated rules in its India investments, according to a commerce ministry official in New Delhi, who asked not to be identified as he wasn’t authorised to speak on the subject.

The prime minister’s office has passed the letter on to other departments for examination and hadn’t requested a probe, the official said.

Wal-Mart is in “complete compliance,” with India’s investment laws, it said. “All procedures and processes have been duly followed and details filed with relevant Indian government authorities.”

India’s government in September decided to allow foreign companies to invest in multi-brand store chains, a sector they had previously been barred from.

Tesco this month posted its first profit drop in almost two decades for the first half of its financial year, with so-called trading profit declining 3.8 percent in Asia, where rising incomes drove surging demand for proteins and groceries over the last decade.

Chains were probably curbing China expansion because “the rate of same-store sales increases is not what they were expecting it to be”, Bloomberg Industries analyst Charles Allen said. “The rate of addition of capacity has probably exceeded the growth of the market.”

Tesco, Wal-Mart and Carrefour all lag Sun Art Retail Group, a venture between Taiwan’s RT-Mart and France’s Groupe Auchan, by share of China’s hypermarket industry, according to data from London-based Euromonitor International.

Sun Art and regional stores such as Yonghui Superstores and China Resources Enterprise’s Suguo chain built a strong presence in smaller cities, making it harder for foreign players to win over these so-called tier-two and three cities, Vivian Liu, an analyst at Sinopac Securities Asia, said.

Regional chains “know local practice better and that allows them to be more nimble and pragmatic in areas such as supply-chain management”, Liu said. Big cities, where foreign companies first entered, were “quite saturated and competition is fierce”, according to Liu.

Global retailers have been taking steps to advance in China for more than a decade. They got a boost from the country’s 2001 entry into the World Trade Organisation (WTO), which eased restrictions on foreign investment.

Before joining the WTO, China required overseas retailers to form ventures with local partners. Those restrictions gradually eased and by 2004 the retailers were permitted to have wholly-owned operations, prompting them to ramp up growth.

Tesco entered China in 2004 as part of a joint venture of the Hymall chain of hypermarkets, which it subsequently bought.

Wal-Mart, which entered China in 1996, in 2007 invested in closely held grocery and appliance store chain Trust-Mart.

Their expansions now face a road bump as China’s economy has unexpectedly weakened. The International Monetary Fund in October reduced its estimate for China’s growth this year to 7.8 percent.

In 2010, Tesco planned to double China hypermarkets and shopping malls to 200 in five years. Now, instead of opening around 20 stores a year, it will open 16 hypermarkets this year. It closed four outlets in August. It’s also building fewer shopping malls than planned.

“Conditions remain difficult and no doubt China is still in the red”, for Tesco, said Investec analyst Dave McCarthy, who has a sell rating on the UK retailer. “Just because China is big, this does not make it attractive and building large stores there may not be the right answer.”

The retail company doesn’t disclose China earnings. Tesco got about 2 percent of its global revenue of £64.5 billion (R895.9bn) from China in the year to February, according to data.

Rival Wal-Mart has said it is opening fewer China stores this year than originally planned.

The US retailer reported a 5 percent decline in second-quarter traffic, a measure of visitors, to China stores and gross profit that was little changed on a 5 percent rise in sales on a comparable basis. The company didn’t provide specific earnings numbers for China.

The retailer continued to open China stores and sales rose in the financial second quarter, spokeswoman Christina Lee said. Wal-Mart China was cutting back on its expansion to improve “site selection and store design, optimise customer shopping experiences”, she added.

Research published by the China Chain Store and Franchise Association showed the country’s retail industry faced “a number of new challenges” that included the need to “restructure” traditional business models and enhance profitability, Wal-Mart said. The retailer wants to “achieve greater efficiencies” in its China business after building a strong business there.

Foreign retailers have had hiccups in other parts of Asia. Carrefour in August said it would shut its Singapore stores before the end of 2012 amid competition from local chains such as NTUC FairPrice and Dairy Farm International, two years after closing stores in Thailand.

In South Korea, Tesco’s second-largest market after Britain, profit was hurt by restrictions to store opening hours that are forcing the retailer to shut all stores for two Sundays a month.

China’s gross domestic product expanded 7.4 percent in the third quarter, slowing for the seventh consecutive quarter, although industrial production, retail sales and fixed-asset investment accelerated in September.

The foreign retailers are still predicting they will benefit from Asia over time. Tesco would stick with China “because there is still significant opportunity for future growth”, Clarke told reporters on October 3.

The Chinese retail industry has great potential due to stable economic growth and government policies to boost demand, Wal-Mart’s Lee said.

Carrefour has maintained its pace of store openings in China, adding about 20 per year for this year and last.

Even shoppers such as Zhang, who favour “wet” markets, still do part of their shopping at big-box retailers. Zhang says she turns to modern supermarkets for some of her vegetable shopping, or special items such as basil and rosemary.

In the near term, however, if China’s economic slowdown prolongs, the chains could see bigger slowdowns, said Liu, the analyst at SinoPac. “It will take longer to recover their investments on new operations, profits may not reach previous levels and expansion plans may contract further.” - Bloomberg

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