Tesco scales down ambitions for China

Posted on July 20, 2012

“You’ll find more people in Chernobyl on a winter’s day,” is how one Tesco manager sums up the lacklustre business at one of the company’s Chinese shopping malls.

The mall in question, in Qingdao, a large port city, was supposed to be one of the focal points of Tesco’s vast effort to crack the Chinese market. Instead, it has become a symbol of the company’s difficulties in the world’s second-biggest economy.

    On what should have been a busy shopping afternoon before a long weekend, all of the cash registers on the lower level of the Tesco store in the Qingdao mall were closed – with empty trolleys barricading the path to them.

    “They haven’t been open for the past year, except for a few days at spring festival [Chinese New Year],” said a sales assistant. “It’s what the boss ordered.” In total, eight of the stores’ 40 cash registers were open.

    To be fair, there were many more people in the aisles than one would expect in Chernobyl, but the numbers are far lower than Tesco had hoped to attract when it entered China in 2004.

    The British retailer had big plans for China. As recently as late 2010, it was talking about doubling its number of Chinese hypermarkets to more than 200. It also planned to open 50 “Lifespace” shopping malls by February 2016, with a further 30 in development.

    But Tesco has quietly scaled down these ambitions. Sales have disappointed and the shopping mall projects have been difficult to execute.

    It comes as Tesco faces restrictions on store opening hours in Korea, slowing sales in the US, and a struggle to turn round its UK business.

    Last year, Tesco decided to slow the development of Lifespace malls, and currently has eight. Clive Black, an analyst at Shore Capital, says: “By February 2016, you would be lucky if they have 16.”

    Tesco has also decided to slow the hypermarket rollout. It will open between 15 and 20 this year.

    According to Mr Black: “Tesco has ebbed and flowed on China. There has been more ebbing than flowing.”

    Tesco is not thought to have broken even in China. It does not disclose its financial performance, but Mr Black estimates that Tesco lost about £50m in China in the year to February 2012.

    Tesco’s like-for-like sales growth in China in the first quarter was 0.6 per cent, down from 6.4 per cent growth a year earlier. In 2011, while Chinese retail sales grew 17.1 per cent last year, Tesco’s like-for-like sales were up a mere 4.1 per cent.

    Tesco says China is difficult for all retailers, with a slowing market and many store groups chasing rapid expansion. It believes its relative performance has improved over recent yeas, while it offers good, safe food.

    But in the Qingdao mall, Tesco appears to have made some basic mistakes. The ground floor is dominated by a car park and the grocery store does not start until the second floor – despite the fact that most shoppers arrive by foot or bus. It is also competing with a long-established local store, Liqun, which is across the road and thrums with people.

    Tesco says it continues to learn lessons about the Chinese consumer – and having car parks in stores is all about “future proofing the offer”.

    However, the Qingdao mall is beginning to show signs of disuse that may make it even harder to lure shoppers. The upper two levels of the five-storey building are all but abandoned, with most windows papered over. Outside, the advertising billboards have faded from sun exposure.

    Not all is lost, though. The food aisles in the hypermarket show that Tesco has made good progress in localising its offering.

    Towards the end of the day, with a few dozen shoppers scattered round, the staff selling meat-stuffed buns shout out the deals as if they are in an open-air Chinese market: “Everything on sale, everything on sale!”

    Some analysts believe this will not be the only thing to be on sale – raising the possibility that Tesco could eventually look for a joint venture, or even pull out of China. Mr Black says: “If China remains lossmaking for the foreseeable future I think investors will put pressure on Tesco to reduce investment and potentially withdraw.”

    However, earlier this year, Philip Clarke, Tesco chief executive, insisted he remained committed to the market.

    Tesco is now concentrating on three regions: Liaoning and Beijing in the north-east; Shanghai in the east and in the south around Guangzhou. It is experimenting with smaller convenience stores, and looking to launch an online grocery business in China in the next year.

    As Mr Clarke said shortly after becoming chief executive in 2011: “For me, China is not a race, its not a sprint. If it’s a race at all, it’s a marathon.”

    Additional reporting by Simon Mundy

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