Two of the most intriguing developments in the retailing scene in the Greater China region for some time came together dramatically yesterday with the revelation that new potential merger partners China Resources Enterprise and Tesco are also discussing a joint bid for the Hong Kong based supermarket business ParknShop.

AS Watson-owned ParknShop is the second-largest grocer in Hong Kong, behind fellow local player Dairy Farm.

The operation boasts 345 stores and generated revenues of HKD21.7 billion (USD2.8 billion) in 2012. Most of its stores are located in the Special Administrative Region, but it also has a handful of stores in nearby Macau as well as around 30 hypermarkets in southern mainland China.

It emerged last month that billionaire backer Li Ka-shing had put his ParknShop supermarket operation under review, after reportedly becoming frustrated with the stagnant domestic retail environment, and the slowdown in mainland China.

Analysts value ParknShop in the region of USD3-4 billion, which would not be an issue for the cash rich and Chinese government backed China Resources, but there is stiff competition from fellow bidders – understood to be private-equity firms KKR & Co and TPG Capital along with Auchan-backed Sun Art Retail, Japan’s leading retailer Aeon, Korea’s leading grocer Lotte Shopping, as well as Australian contenders Woolworths and Wesfarmers.

As for the China Resources / Tesco merger deal in mainland China, there are scant details on what the resulting retail operation would look like, but there’s a very strong possibility that Tesco’s fascias will disappear from the Chinese retail scene and that the UK retailer will focus on the back end of the operation.

If we were to also assume that this scenario would be extended to Hong Kong, the benefits of the proposal to China Resources are readily apparent.

The Chinese owned retailer occupies a distant third place in the Hong Kong market and has struggled to successfully address the lucrative pockets of wealthy local and ex-pat consumers that Dairy Farm and ParknShop have managed to tap into.

Although China Resources can bring to the table its relatively successful Vanguard store formats and fascia that could be readily grafted onto ParknShop locations, a little help from Tesco has the potential to transform the proposition - not least in terms of customer experience, which has suffered from a complacent virtual duopoly between Dairy Farm and ParknShop for many years.

Tesco’s expertise in such aspects as private labels, loyalty scheme operation and data mining, in-store merchandising as well as supply chain could provide a competitive edge to inflict serious damage on Dairy Farm’s Wellcome supermarket operation. E-commerce is another area where Tesco could provide a point of difference from the current rather rudimentary offering of the established players.

The rationale for Tesco’s involvement, however, is less clear. It is likely that Tesco would have to pay a substantial sum, in addition to contributing its stores and mall assets, to obtain the mooted 20% stake in the merged Chinese entity, and the Hong Kong foray would seem likely to merely increase the necessary outlay further.

On the other hand, however, there is such a clear benefit to China Resources from having Tesco on board in Hong Kong, that the UK retailer could perhaps use this as a bargaining chip in its negotiations over the much bigger deal – the China merger.

Matthew Stych, analyst, Planet Retail