Tesco revealed today it will exit Japan in two stages, the first of which involves selling 50% of the operation to Japan’s largest retailer Aeon for a “nominal sum”. The grocer will then form a joint venture with Aeon and will invest a further £40m into the business to finance further restructuring. Commentators believed the move made sense.
“The exit from Japan leads to the removal of a distraction and a potential source of substantial capital absorption. Therefore, whilst having to pay c£40m to exit the market is a disappointment of sorts to our minds, it reveals the challenges of the Japanese market (i.e. a traditional supply chain, a weak consumer and few buyers for stores) and caps the damage from what is a subscale business. Trading from less than 120 small stores in a market of 110 million people is demonstrably subscale to us, which means that substantial capital would have been necessary to make this a meaningful business. Given ongoing trading losses of c£30m after approaching a decade in the market, Tesco appears to our minds to have taken the correct approach with funded withdrawal.” – Clive Black, Shore Capital
“Japan has proven difficult for Western retailers to crack, and Tesco is by no means alone to have struggled, despite building up 117 outlets there. In 2005 Carrefour exited Japan after just five years. WalMart has also failed to make a dent, and is now targeting acquisitions thanks to weak organic opportunities. Metro, the other big global player, has only a very limited presence, just nine wholesales stores based in the Tokyo metropolitan area. To some this may further signal Clarke’s intention refocus on the UK, but the fact is that Tesco’s supermarket format and product mix, even toned down, did not suit a market that dominated by convenience.” – Jon Copestake, Economist Intelligence Unit
“Beggars cannot be chosers so this represents a decent move for Tesco. The Japanese business has been off the balance sheet for a year but obviously the market is tough and perhaps there were not many buyers looking at it. Part of the reason they paid £40m was to retain the structure and staff of the business. While that may have been a little much it fits with the Tesco values of treating others as you would like as they would’ve effectively have had to sack staff otherwise. This does not tell us a great deal about Tesco’s international strategy, while Philip Clarke is clearly able to take tough decisions it doesn’t mean Tesco will exit the US where it seems confident of breaking even.” - Philip Dorgan, Panmure Gordon