Tesco has been firmly in the spotlight of late after revealing a glimpse of the future in its new Watford store and taking action to stem losses in China.
In the space of 24 hours, we’ve had a preview of the new look Tesco Extra store in Watford, and then news from halfway across the world of a potential joint venture with China’s second largest grocery retailer CR Vanguard – owned by state-backed China Resources Enterprise (CRE).
The deal would create a powerhouse in Chinese grocery retailing – making it China’s leading multi-format retailer with over 3,000 stores and with annual sales of around £10bn.
There’s plenty to play for. China is the world’s largest grocery market and we forecast it to be worth over $1.5 trillion by 2016. The UK, by contrast, is forecast to be worth $278bn over the same period.
While some commentators seem surprised by the move, it fits with Tesco’s refocused international strategy and there are clear benefits for the Cheshunt-based retailer.
In a market where it’s vital to understand local tastes and demands on a provincial and even city level, Tesco will reap the rewards from the domestic retailer’s expertise on local shoppers.
The deal will also massively boost the UK retailer’s geographical reach. While Tesco is currently present in nine provinces, all concentrated on the eastern coast, CRE Vanguard covers 24 provinces throughout China.
And with Tesco’s ambition to be a leading multichannel retailer in all the markets in which it operates, this deal in one bold move will help create China’s leading multi-format retailer. It would combine Tesco’s hypers and handful of Express stores with CR Vanguard’s hypers, supermarkets, convenience-stores, cash and carry and liquor-store formats.
The synergies created by the partnership would also free up funds for Tesco to invest in its other international markets, while helping it to take a longer-term view on China with a well-regarded strategic partner.
While the deal does carry some risks and Tesco would be relinquishing total control of its existing Chinese operations for a 20% in the new partnership, overall the move makes sense.
And although only at the stage where the two companies have signed a Memorandum of Understanding, we wait to see what happens when you combine Tesco’s international experience and supply chain expertise with CR Vanguard’s understanding of the local Chinese market.
While Tesco has several ongoing challenges both at home and abroad, developments this week show that the senior team aren’t afraid to think creatively and position the company for a new era of retailing.
Nick Miles is a senior retail analyst at food and grocery researchers IGD