business news in context, analysis with attitude

Tesco, the UK's number one supermarket chain, announced that it will be making a bid to acquire C Two-Network Co. there, a c-store and supermarket chain generating the equivalent of $470 million (US) a year in sales, and $4.5 million (US) in annual profits.

Tesco has offered the equivalent of $286 million (US) for the chain of 78 stores, most of which are in the Tokyo area. It is expected that the offer will be accepted, and it has been endorsed by C Two-Network's top management and biggest shareholders.

"The acquisition of C Two-Network is the next step in our international strategy for long term growth," said Sir Terry Leahy, Tesco CEO. "We first signaled that we would be researching Japan in 2000."

Leahy also said that the "C Two-Network is a great success in Japan and will provide Tesco with an excellent opportunity to enter a large and unconsolidated market with potential for growth."

Tesco deputy chairman David Reid told The Financial Times that the acquisition was a "measured first step" into the notoriously tough and fragmented Japanese market and said: "There may be further opportunities (there) in the medium term".

"Japan is the second biggest market in the world in terms of food retailing and has strong expenditure per head - stronger than in the UK," he said. Reid told the FT that Tesco wanted to gain experience in Japan before branching out further. "It's a very good entry vehicle. Much of Japan's supermarket industry does not make any money or return on capital. I think there are too many chains that have opened and have borrowed money and have not delivered the results, hence there's a sort of financial stagnation."

Tesco already generates the equivalent of more than $3 billion (US) from its other Asian operations.
KC's View:
The Tesco move, which one British analyst described as being "comfortably modest," has to be seen within the context of other activity taking place in Japan.

Wal-Mart, which is a major rival to Tesco in the UK with its Asda Group, is advancing its presence in Japan through part ownership of Seiyu, which it almost certainly will expand upon in the near future. And Seiyu is adapting more and more Wal-Mart conventions; just yesterday, the Japanese retailer announced that it plans to sell Wal-Mart's popular "George" clothing label in its stores.

And yesterday, here on MNB, we had a story that both French retailer Carrefour and Costco were expanding their Japanese outposts. Carrefour reportedly was negotiating an agreement with Daiei there, hoping to expand its presence in a market where it has only opened four stores since 2000; over the past 24 hours, however, there have been some qualified denials of those reports, though we're not sure at this moment where the truth actually lies. And Costco has announced that it will open four new stores in Japan by August 2005, doubling its store count there.

So there's a lot of activity going on in Japan, with global companies looking there for opportunities to build revenue and profits there. The profit part may be harder, though, at least in the short term, since Japan is in the midst of economic difficulties that make it a lot harder to make money.

The Tesco move is of particular interest to us, since not only has that company been interested in Japan since 2000, but there has been Japanese interest in Tesco for almost as long. Two years ago, we helped produce a Japanese video documentary about Tesco's UK operations and strategies…which suggested to us even then that there was the beginnings of some kind of courtship taking place.