Tesco Remains Committed


The world's third largest retailer, UK based Tesco has announced plans to increase store presence in Southern China over the next five years. Following its recent exit from its US Fresh & Easy chain, continued investment in the Chinese consumer is likely to form an essential part of emerging markets growth going forward. As the retailer implements domestic restructuring of UK operations amidst a sluggish, maturing European retail landscape, the success of China will likely be key in aiding Tesco's recovery from the failings of its less profitable international ventures.

No Signs Of Slowing
China Total Mass Grocery Retail Sales (US$bn)- Historic & Forecast

In the wake of 2012 pre-tax earnings down 96% year-on-year to GBP1.96bn, (largely due to a £1.2bn write off in the US) Tesco is under immense shareholder pressure to return focus to the UK, and more importantly, secure growth. Having exited Japan, the world's third largest mass grocery retail sector in 2011, the expansionist policies pursued under previous CEO Terry Leaghy are largely abandoned. However, by continuing to commit to the Chinese retail sector, Tesco has demonstrated its confidence in the long-term growth potential of the sector. Although the retailer has certainly seen the perils of international expansion, it remains emerging markets such as China that continue to offer impressive potential going forward.

Convenience Largely Untapped
China Selected Outlet Sales (US$bn)

In our view, China 's mass grocery retail sector continues to offer international retailers dynamic opportunity. Its vast population and burgeoning middle class, paired with our forecast mass grocery sales compound annual growth rate of 8.8% to 2017, continue to support promising consumer outlook. Unlike maturing Western markets, the sheer size of the country also offers retailers the opportunity to expand beyond saturated urban centres, an opportunity Tesco is well placed to provide with its multi-format strategy. As demonstrated by the graph above, hypermarket/ supermarket formats continue to perform well, with the largely untapped convenience/ discount sector offering further room for expansion (formats Tesco is more than experienced in bringing to a largely modernised retail sector). Plans to roll out online shopping in the coming months will likely only serve to increase the retailer's outreach across the country.

Asia Key
Tesco Group Revenue Breakdown By Region (%)- FY11-FY12

However, focusing on international operations will have to be carefully balanced with the need to solidify growth at home, a concern that Tesco has not been alone in trying to achieve. French retail giant Carrefour has also recently struggled with business abroad, selling assets in both Colombia and Indonesia to pursue domestic restructuring under new CEO Georges Plassat. However, despite easing of international ambitions for the company that lost 40% of its share price value in 2011, it too remains committed to securing growth in China. Highlighting further confidence in the impressive long-term potential of the country's consumer outlook, multinationals continued investment, from brewer SABMiller to confectionary giant Hershey's, China remains a vital platform for emerging market success.

This article is tagged to:
Sector: Food & Drink
Geography: China, China, China, China

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