British Retailer Tesco (TSCO) In Talks With China Retail Firm For Ambitious Joint Venture

Giant British retailer Tesco PLC (LON:TSCO) is talking with Chinese supermarket firm China Resources Enterprise, Limited (CRE) (HKG:0291) about joining forces to become a leading multi-format retailer in China.

Tesco announced on Friday that they’d signed a tentative agreement with CRE, which outlines a potential partnership where CRE’s local China expertise is combined with Tesco’s global retail knowledge.

The proposed joint venture would enjoy annual sales of 10 billion pounds ($15.6 billion).

CRE, which already controls almost 3,000 stores in Hong Kong and China, would have an 80 percent interest in the venture. Tesco, who owns 131 stores in China, would have a 20 percent stake.

The deal isn’t yet completely finalized or certain, said Tesco.

But the agreement actually represents a step away from its China business, retail analysts told Reuters on Friday.

“This may look win-win, but in reality, Tesco is saying, ‘I can’t figure out China’,” said one Hong Kong mergers and acquisitions banker.

“Tesco has been struggling in China and losing money,” he said.

In its latest management statement, Tesco said its China business shrunk by 4.9 percent in its first financial quarter for 2013-2014, worse than a 2 percent contraction in 2012-2013.

Tesco earlier decided to exit from the U.S. and Japanese markets, in 2013 and 2012 respectively. It has opted instead to focus on its British home market for now.

In China, the potential partnership’s fiercest competition will likely come from market leader Sun Art Retail Group Ltd (HKG:6808), a joint venture between Taiwan’s Ruentex Group and French retailer Groupe Auchan SA, which has a 13.6 percent market share in local hypermarkets.

The hypermarket industry there is likely to be worth 863.8 billion yuan ($141 billion) by 2015, according to Euromonitor.