Tesco stumbles with Wal-Mart as China shoppers buy local

Tesco Plc this week is trying to lure Chinese shoppers with promotions on soy sauce, cooking oil and apples. Emily Zhang still won’t do much of her shopping there.

The 30-year-old Shanghai resident buys most of her produce at an informal market close to home where daily supplies are fresh, the location convenient and friendly vendors throw in the occasional cooking tip.

Shoppers such as Zhang are pushing Tesco to shut Chinese outlets and open new ones more slowly two years after announcing plans to double stores and build more 400,000-square-foot malls. Hindered by the country’s slowest economic growth since the 2009 financial crisis and competition from local markets and regional chains, the Cheshunt, England-based retailer’s China same-store sales declined 1% in the second quarter.

Tesco’s China pullback reflects the hurdles global big box retail chains face in Asia, where the realities of complex local markets and slowing economies are damping dreams of easy expansion. The world’s largest retailer, Wal-Mart Stores Inc., is also adding outlets more gradually than it had planned in China’s 3.5 trillion yuan ($560 billion) grocery industry.

Carrefour SA is closing shops in Singapore after failing to overtake domestic competitors. Same-store sales at Carrefour, the world’s second-largest retailer, fell 6.1% in China in the third quarter, excluding currency swings, and declined 3.1% in Asia, it said this month.

“It’s more of a marathon than a sprint,” said Philip Clarke, Tesco’s CEO, referring to China on an October conference call. “Many retailers putting down more space in the market; few seeing that translate into profitable growth.”

LOCAL RIVALS
The company in October posted its first profit drop in almost two decades for the first half of its fiscal year, with so-called trading profit declining 3.8% in Asia, where rising incomes drove surging demand for proteins and groceries over the last decade.

Chains are probably curbing China expansion because “the rate of same-store sales increases is not what they were expecting it to be,” said Bloomberg Industries analyst Charles Allen. “The rate of addition of capacity has probably exceeded the growth of the market.”

Tesco, Wal-Mart and Carrefour all lag Sun-Art Retail Group Ltd., a venture between Taiwan’s RT-Mart and France’s Groupe Auchan, by share of China’s hypermarket industry, according to data from London-based researcher Euromonitor International.

Sun-Art and regional stores such as Yonghui Superstores Co. and China Resources Enterprise Ltd.’s Suguo chain built a strong presence in smaller cities, making it harder for foreign players to win over these so-called tier-two and three cities, said Vivian Liu, an analyst at Sinopac Securities Asia Ltd.

MORE NIMBLE
Regional chains “know local practice better and that allows them to be more nimble and pragmatic in areas such as supply-chain management,” Liu said. Big cities, where foreign companies first entered, are “quite saturated and competition is fierce,” according to Liu.

Global retailers have been taking steps to advance in China for more than a decade. They got a boost from the country’s 2001 entry into the World Trade Organization, which eased restrictions on foreign investment.

Before joining the WTO, China required overseas retailers to form ventures with local partners. Those restrictions gradually eased and by 2004 the retailers were permitted to have wholly owned operations, prompting them to ramp up growth. Tesco entered China in 2004 as part of a joint venture of the Hymall chain of hypermarkets, which it subsequently bought.

Wal-Mart, which entered China in 1996, in 2007 invested in closely held grocery and appliance store chain Trust-Mart.

Their expansions now face a road bump as China’s economy has unexpectedly weakened. The International Monetary Fund in October reduced its estimate for China’s growth this year to 7.8%.

In 2010, Tesco planned to double China hypermarkets and shopping malls to 200 in five years. Now, instead of opening around 20 stores a year, it will open 16 hypermarkets this year. It closed four outlets in August. It’s also building fewer shopping malls than planned.

“Conditions remain difficult and no doubt China is still in the red,” for Tesco, said Investec Ltd. analyst Dave McCarthy, who has a sell rating on the U.K. retailer. “Just because China is big, this does not make it attractive and building large stores there may not be the right answer.” The company doesn’t disclose China earnings.

Tesco got about 1.3 billion pounds ($2.1 billion), or 2%, of its global revenue of 64.5 billion pounds from China in the year ended February, according to data compiled by Bloomberg.

WAL-MART TRAFFIC DECLINE
Rival Wal-Mart has said it is opening fewer China stores this year than originally planned, adding only half the square footage it had forecast.

The U.S. retailer reported a 5% decline in second-quarter traffic, a measure of visitors, to China stores and gross profit that was little changed on a 5% rise in sales on a comparable basis. The company didn’t provide specific earnings numbers for China.

The retailer continues to open China stores and sales rose in the fiscal second quarter, spokeswoman Christina Lee said in a statement via e-mail. Wal-Mart China is cutting back on its expansion to improve “site selection and store design, optimize customer shopping experiences,” she said.

Research published by the China Chain Store and Franchise Association shows the country’s retail industry facing “a number of new challenges” that include the need to “restructure” traditional business models and enhance profitability, Wal-Mart said in its statement. The Bentonville, Arkansas, retailer wants to “achieve greater efficiencies” in its China business after building a strong business there, according to the e-mail.

Foreign retailers have had hiccups in other parts of Asia. Carrefour in August said it will shut its Singapore stores before the end of 2012 amid competition from local chains such as NTUC FairPrice and Dairy Farm International Holdings Ltd., two years after closing stores in Thailand.

In India, all foreign retailers had until September been barred from setting up supermarkets. They still need local partners to enter the world’s second most populous nation. In South Korea, Tesco’s second-largest market after Britain, profit was hurt by restrictions to store opening hours that are forcing the retailer to shut all stores for two Sundays a month.

FUTURE GROWTH
China’s gross domestic product expanded 7.4% in the third quarter, slowing for the seventh straight quarter, although industrial production, retail sales and fixed-asset investment accelerated in September.

The foreign retailers are still predicting they will benefit from Asia over time. Tesco will stick with China “because there is still significant opportunity for future growth,” Clarke told reporters on Oct. 3. The Chinese retail industry has great potential due to stable economic growth and government policies to boost demand, said Wal-Mart’s Lee in the e-mail statement. Carrefour has maintained its pace of store openings in China, adding about 20 per year for this year and last.

Even shoppers such as Zhang, who favor “wet” markets, still do part of their shopping at big-box retailers. Zhang says she turns to modern supermarkets for some of her vegetable shopping, or special items such as basil and rosemary.

In the near term, however, if China’s economic slowdown prolongs, the chains could see bigger slowdowns, said Liu, the analyst at SinoPac. “It will take longer to recover their investments on new operations, profits may not reach previous levels and expansion plans may contract further.”