Tesco in talks with China Resources Enterprise

image captionTesco operates 131 stores in China

China Resources Enterprise (CRE) is in talks with the UK retailer Tesco about merging their hypermarkets and supermarkets in China.

The venture would combine Tesco's 131 stores in China with CRE's almost 3,000 stores, called Vanguard, to create what they say would be the leading multi-format retailer in China.

State-run CRE would control 80% of the new chain while Tesco would have 20%.

Tesco and CRE both confirmed the talks in stock market statements.

They warned that there was no guarantee the deal would be concluded.

CRE said that the venture would bring together its "deep understanding of local customers, established nationwide infrastructure and proven track record as a partner with Tesco's global retail expertise, international sourcing scale and supply chain capabilities".

International challenges

Tesco, the biggest supermarket chain in the UK, first started operating in China in 2004 where it has hypermarkets and some shopping malls containing Tesco stores.

media captionKantar Retail's Insights Director Bryan Roberts: "This reduces risk for Tesco"

Analysts said the joint venture would allow Tesco to reduce the amount of capital it must commit to its China business, while still having a presence there.

"Tesco has been struggling in China and has been losing money. Similar to Carrefour, they had issues in their home market which they had to resolve," one Hong Kong-based banker told the Reuters news agency.

"This may look win-win, but in reality, Tesco is saying 'I can't figure out China'," he said.

With an annual value of more than one trillion dollars, China is the world's biggest market for food and groceries, according to figures from research group IGD.

It also forecasts that China's market will grow by 50% over the next three years.

The current leader in Chinese hypermarkets is Sun Art, which is a joint venture between the Taiwan conglomerate Ruentex Group and the French retailer Groupe Auchan.

Wrong move

After a decade of international expansion Tesco faces challenges in some of its overseas markets.

In April, Tesco said it was abandoning its US chain of 199 Fresh & Easy shops, at the same time announcing its first decline in annual profits in almost 20 years. It is still to be decided whether it will sell the business or close it down.

It also announced that it would leave the Japanese market in 2012.

Tarlok Teji, retail analyst at Manchester Business School, said: "Tesco's chief executive is right to give more attention to the UK operations but wrong to be pulling out of overseas ventures.

"There is no growth in UK retailing. Any growth is forecast to come from international expansion or mobile retailing. Any effort in the UK will cannibalise sales from their own store network or from competitors.

"The only winners are the consumer with keener prices and better customer service."

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