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Last Updated: Thursday, 15 July, 2004, 07:40 GMT 08:40 UK
Why Tesco is betting on China
By Lucy Jones
BBC News Online business reporter

Tesco shopping basket
Tesco's own-brand will be introduced in China
Next time you fill a basket with Tesco's own-brand spaghetti, orange juice and cans of tomatoes, imagine the millions of Chinese shoppers doing exactly the same.

The British chain has become the latest foreign retailer to enter the fabled gold-mine of China.

After a three year search, Tesco has joined with Ting Hsin, a 25-strong, upscale hypermarket based in the Shanghai region, in a deal worth 140m ($260m).

The pair plan to rapidly colonise the Chinese east coast with large, modern shops, not unlike the ones you find at home.

"At first we will sell what is in stores at present... then look to bring in our own brand," Tesco's corporate affairs director Lucy Neville-Rolfe says.

Why China?

China has been irresistible to foreign retailers ever since the government started allowing them to set up there back in 1995.

TOP RETAILERS IN CHINA
Shanghai Friendship
Beijing Gome Home Appliance
Carrefour
Wal-Mart
Beijing Hualian Group
Dashang Group
Source: Retail Asia-Pacific magazine

The statistics are mouth-watering.

China has a population of 1.3 billion people - compared to Britain's 59 million - and an economy which is surging 9% a year.

"The middle class is said to outnumber the entire population of the United States," says a spokesman for Britain's Kingfisher which has introduced B&Q to the Chinese.

By 2002 foreign companies accounted for nearly one-quarter of major supermarkets in China, the country's State Economic and Trade Commission found.

Wealthier shoppers

The London-based Economist Intelligence Unit (EIU) in its June 2004 "white paper" on multi-national companies in China points out two other factors which make the country a red-hot destination for Western retailers.

Firstly, the Chinese government does not view consumer goods as a strategic sector, unlike steel or telecommunications, which are subject to greater scrutiny and restriction.

Areas targeted by foreign retailers
French retailer Carrefour, the EIU says, has made little secret of its bending of the country's retail rules.

Secondly, the Chinese are getting richer.

By the mid-1990s, around 350 million people had an annual income of $500 or more, which helped create a consumer market that could afford goods such as soap and detergents.

"People used to buy from day to day," Nick Debnam, a partner at KPMG in Hong Kong points out.

"For example, they would buy shampoo by the sachet. They would never buy a bottle. But all that's changed.".

Pitfalls

But Tesco and other retailers face huge challenges by betting on China.

The Chinese are quick to copy a good idea.

"Locals competitors see a hypermarket which works and then launch their own. They are not giving up without a fight," said Mr Debnam.

Local stores are also very competitive on price and also often enjoy greater government backing than their foreign counterparts.

More foreign retailers are likely to enter the market after the government lifts restrictions on their activities at the end of the year.

Meanwhile, many companies underestimate the size of the market, analysts say.

There is no point for example advertising in a neighbouring province as the effort will be wasted.

"Going into a province in China is like going into one country in Europe," Mr Debnam adds.

The EIU report also points other difficulties:

  • Distribution remains a problem because of poor infrastructure

  • Finding good people is difficult

  • Advertising costs are high.

    But Tesco is undaunted.

    Lucy Neville-Rolfe says there is certainly a "need to go local".

    "We will be using word of mouth and fliers," she said, to promote the stores.

    She says Tesco is used to competition, and has competed elsewhere in the world with market leaders in China, which include the French chain Carrefour and the US's Wal-Mart.

    Chief executive Sir Terry Leahy echoed other retailers when he commented on Tesco's China deal.

    "China is one of the largest economies in the world with tremendous forecast growth," he said.




  • SEE ALSO:
    Tesco gains a foothold in China
    14 Jul 04 |  Business
    Tesco sales surge above forecasts
    18 Jun 04 |  Business
    Environmentalists target Tesco's
    17 Jun 04 |  Business
    Tesco plans to create 1,000 jobs
    01 Jun 04 |  Cambridgeshire
    Tesco may expand Japanese empire
    27 Apr 04 |  Business


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