Tesco considers CR Vanguard merger in China

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Supermarket giant Tesco is in talks with China's largest retailer to merge their operations in the country in a move marking a major shift in strategy over one of its key growth markets.

Tesco said the merger with CR Vanguard - owned by state-run China Resources Enterprise (CRE) - would create a business with more than 3,000 stores and combined sales of around £10 billion.

But the deal leaves a question mark over the future of the Tesco brand in China and would bring an end to the group's independent business in one of the world's fastest growing retail markets.

Tesco would own a stake of 20 per cent in the joint venture after bringing its 131 stores in the country together with Vanguard's 2,986 shops across China and Hong Kong.

Tesco, which has agreed a memorandum of understanding with CRE, said the proposed tie-up is consistent with its "strategy of focusing on profitable routes to growth in fast-growing but less mature markets, with a disciplined approach to the allocation of capital".

It added that the merger talks follow a series of joint ventures struck between CRE and other multi-national companies.

But a deal to end its go-it-alone strategy in China may be seen as a further retrenchment after deciding in December last year to pull the plug on its Fresh & Easy venture in the United States.

Tesco's recent first quarter trading update also revealed tougher trading in China as like-for-like sales dropped 4.9 per cent in the country, following a 2 per cent decline the previous three months.

Tesco is focusing its efforts on turning around its domestic operations after falling market share and intense competition prompted the chain's first profits warning in 20 years in January 2012.

Chief executive Philip Clarke unveiled a £1 billion overhaul in April last year and recently revealed a shift in strategy away from increasing store space to modernising its existing shops, while also focusing more on convenience outlets and online sales.

The group's Chinese operation has grown from 56 stores to more than 130 in five years.

Tesco is present in nine provinces, focusing on the fast growing Shanghai, Tianjin and Liaoning provinces.

Tesco China also includes the six-strong Lifespace shopping mall business.

Vanguard was set up in 1999 and is owned by CRE, a Hong Kong-listed company, whose majority shareholder is held by state-owned group China Resources Holdings.

It is thought a deal with CRE will take several months to finalise.