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Tesco announces retreat from Japan Add to ...

Tesco has put its poorly performing Japanese business up for sale after failing to build scale in a country that is notoriously competitive and difficult for foreign retailers to crack.

The U.K. retailer, which has 129 stores predominantly in the Greater Tokyo area, entered Japan in 2003 with the acquisition of C Two Network, a discount supermarket chain.

But Tesco’s commitment to Japan, where it employs 4,000 people, had come under question before Wednesday’s announcement. It was the weakest country for sales growth in its 2010-11 financial year, with like-for-like sales down by 8.1 per cent, way below the performance of other countries in the region like South Korea and Thailand.

Philip Clarke, the new chief executive of Tesco, on Thursday conceded the retailer had failed to grow fast enough and would therefore sell the business.

On entering Japan Tesco believed that smaller supermarkets, like the Tsurukame stores operated by C Two Network, met a need among Japanese consumers for local stores that stocked basic goods they would buy on a daily basis.

It also invested in its own private brand products for Japan and food processing centres to allow it to deliver fresh processed foods to its stores.

But Japan’s supermarket sector is fiercely competitive and unprofitable, with even Aeon and Ito Yokado, the two largest supermarket groups, which enjoy huge economies of scale, struggling to improve profitability.

Carrefour, the French supermarket owner, retreated from Japan in 2005 after just five years, selling its 8 hypermarkets to Aeon, Japan’s largest supermarket group. Walmart has also faced difficulty raising the profile and profitability of its Seiyu group of supermarkets, which are a much better known brand than Tsurukame or Tesco.

Mr. Clarke, who took over as chief executive in March, said: “Unfortunately, it has proved to be very difficult to shift consumers from stores that they use into new ones.” Weak economic conditions had been an obstacle, he added, but one that had been less significant than lack of scale.

Kate Calvert, an analyst at Seymour Pierce, the broker, welcomed the move, even though she said it was financially immaterial in group terms. “The strategic decision by Phil Clark to finally dispose of its Japanese business will be welcomed by the market, for Tesco has never made an acceptable return from the business,” she said.

The retreat from Japan comes as Tesco makes strides in other Asian countries. Tesco’s biggest operations outside Britain are in South Korea. Sales there increased to 11,000 billion Won ($10.2-billion) last year from 9,800-billion Won in 2009.

Analysts say Tesco owes much of its success to its appointment of Lee Seung-han of the Samsung Group as the local chief executive. They say he quickly moulded Tesco to a Korean retail model while Walmart and Carrefour, which pursued international models, had to quit Korea. Unlike in Japan, it has strength in scale in Korea with 129 hypermarkets and 255 smaller express outlets.

In Thailand, Tesco Lotus, the U.K. company’s Thai subsidiary, is the country’s largest retail grocer. It controls more than 12 per cent of the market, and says that sales are growing at 18 per cent a year, fuelled by the rapid expansion of south-east Asia’s middle class. In 2009, the last year for which detailed figures are available, Tesco Lotus generated sales of £2.34-billion.

Mr. Clarke argued that the Tesco assets in Japan would be attractive to rivals: “This is quite a unique investment opportunity. It’s an opportunity for somebody who is already in the market to expand or to obtain scale in small format supermarkets.”

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