Tesco Corporation (USA) (NASDAQ:TESO)‘s venture into the world’s biggest market for food and groceries has proved to be challenging as the company struggles with negative growth in China. In the company’s first quarter of 2013, ended May 25, China’s like-for-like growth, excluding petrol, declined 4.9%. The decline in growth worsened from the fourth quarter’s drop of 2%. China’s bird flu crisis and its impact on the food supply affected the business and decreased demand for pork products. A slowdown in China’s economy and lack of spending by China’s middle class also contributed to current losses. The country’s highly competitive and fragmented retail sector adds another layer of difficulty for retailers operating in China. Tesco Corporation (USA) (NASDAQ:TESO) competes with rivals such as Sun Art Retail Group, considered the Wal-Mart Stores, Inc. (NYSE:WMT) of China, which has considerable knowledge of the Chinese market, along with international expertise.
Tesco Corporation (USA) (NASDAQ:TESO) grew its business in China over the last five years, with the number of stores increasing from 56 to the current number of 131. The failure to earn a profit on their investment has prompted the company to partner with a local Chinese big-box retailer, China Resources Enterprise, or CRE. The plan is to combine Tesco Corporation (USA) (NASDAQ:TESO)’s 131 stores with CRE’s CR Vanguard stores; Tesco Corporation (USA) (NASDAQ:TESO) retains a 20% stake in the business and CRE an 80% interest. CRE has a track record of successful joint ventures and acquisitions of other companies in China that has allowed it to maintain its market share .
A profitable partnership expected
Analysts have estimated that Tesco Corporation (USA) (NASDAQ:TESO) spent about $3.1 billion in setting up its independent stores in China and made about $2 billion a year. The joint venture with CRE is expected to have combined sales of $15.7 billion, so Tesco’s 20% stake can earn the company about $3 billion annually. The smaller stake in this venture also presents an opportunity for the company to control its overseas capital expenditures .
CRE has also experienced its own challenges brought on by current market conditions, with underlying consolidated profit decreasing 9% during the first quarter. Same store sales grew 3% in the first quarter due to moderate growth in the sales of consumer goods. Growth in the retail division’s same store sales has been declining since the first half of 2011, which had a 12.9% growth in sales to its current level. However, the declining growth appears to be stabilizing. CRE has remained focused on expansion to maintain its market share, with 2013 capital expenditures budgeted at $1.1 billion; 76% of the funds will be spent between its beer and retail segments. Operating cash flows increased 38% in the first quarter, which provides resources for additional investments .