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Tesco says sayonara to Japan after eight years

Tesco is to pull out of Japan after admitting it could not build a business of sufficient scale in the country, where it launched eight years ago.

But Philip Clarke, the chief executive of Tesco, tried to quash any speculation that the grocer may also seek to pull the plug on its Fresh & Easy chain in the US, which suffered losses of £186m in the year to 26 February.

Tesco – which has operations in 14 countries, including Japan and the UK – has vowed to make Fresh & Easy profitable by the end of 2012-13. Mr Clarke said yesterday: "We've got great opportunities in Asia in businesses where we are market-leading and I think any comparison with Fresh & Easy would be inappropriate."

But the world's third-largest retailer by sales has put its Japanese business on the block. It launched there by acquiring the C Two-Network grocery chain and 76 stores in 2003.

Mr Clarke said: "We have concluded that we cannot build a sufficiently scalable business." He said that Tesco would now focus on its larger businesses in Asia, such as in South Korea, China, Thailand and Malaysia.

While more than half of the 129 stores it operates in the Greater Tokyo area under the Tsurakame, Tesco and Tesco Express formats are profitable, the retail giant's market share remains "tiny" compared with Japan's biggest chains, including Lawson, 7-11 and FamilyMart.

Gavin Rothwell, a research manager at IGD, the trade body for the food industry, said: "The retail market is fragmented and there are many strong regional players, often family-owned. Convenience stores dominate, particularly in the city centres, and a culture of 'immediacy' supports large numbers of vending machines or kiosks."

Tesco will continue to trade its stores in Japan and a sale of the business is unlikely to be completed until next year.

Back in April at Tesco's full-year results, Mr Clarke said the grocer would "not commit more capital [to Japan] unless we can clearly see a way to win".

It also brought back to the UK Michael Fleming, its chief executive of Japan, in the newly created role of group strategy director in May. Bill O'Neill, another long-term executive at the grocer, is now at the helm in Japan.

Not only is Japan Tesco's smallest international business, but it was also its worst-performing after sales fell by 6.4 per cent in the first quarter.

Clive Black, at Shore Capital, estimates that Tesco suffered losses of about £20m last year in Japan and has invested around £260m in the country since 2003.

He said: "This decision [on Japan] should send a message throughout the group that Mr Clarke is not about flag pitching and is about creating a sustainable, balanced model for growth." Mr Black added that this decision will particularly "resonate" in the US, where Shore forecasts accumulated losses of more than £700m by February 2012.

Tesco pulled out of Taiwan in 2006, as part of an asset swap with Carrefour for shops in the Czech Republic and Slovakia.