Tesco has announced that it has entered into a Memorandum of Understanding with China Resources Enterprise (CRE) and are in exclusive talks to combine their operations in the country.
Combination would bring together best of both companies
Tesco said that the combination of the two companies' operations would 'bring together CRE’s deep understanding of local customers, established nationwide infrastructure and proven track record' with 'Tesco’s global retail expertise, international sourcing scale and supply chain capabilities'. If talks are successful Tesco will retain a 20% stake in the combined business with CRE owning 80%. However, the company did note that there was 'no certainty that a transaction' would occur.
The combined entity generated sales of CNY82.4 billion (GBP8.2 billion) and operated 3,117 stores at the end of 2012. Together CRE and Tesco accounted for just under 1.5% of the Chinese market.
Partnership meets Tesco's 'disciplined approach to capital allocation'
Tesco's chief executive, Philip Clarke, has previously split the company's international markets into three groups, with China included in a cluster with India and Turkey that was meant to see it 'refocus on more profitable approach to growth'. The approach was designed so that the company could allocate appropriate capital to markets where it sees both sustainable advantages and also potential for market leadership. The move to combine its operations with CRE should help it meet this tenet of its strategy.