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October 9, 2013 4:10 pm
“You take the high road, and I’ll take the low road ...” Two of the west’s biggest retailers have swapped emerging market strategies. Last week, Tesco threw in the towel on its attempts to go it alone in China and formed a joint venture with China Resources, a local rival. This week, Walmart threw in the towel on its joint venture in India and decided instead to go it alone.
Yes, the circumstances are different. Tesco is groping for a business model that works, and joint ventures have been successful for the company elsewhere in Asia. Walmart is responding, in part, to regulatory restrictions. But the basic problem is the same. There are huge opportunities in both countries, but they are proving hard to exploit.
Neither operation adds much to the parent’s investment case. Walmart’s 20 wholesale stores in India are just 0.2 per cent of the group total store count. Even in China it has just 400 stores. Only 2 per cent of Tesco’s stores are in China. Even if the two companies manage to get it right in China and India, and even if they can combine rapid growth with an acceptable profit margin, the day when these countries make a meaningful contribution is a long way off.
There is little to indicate that shares in Tesco and Walmart come with an emerging-market growth kicker. Tesco, with all its overseas exposure, is on 11 times forecast earnings. Rival Sainsbury, which has a UK-only strategy, is on 12. On the other side of the Atlantic, globally spread Walmart trades on 14 times, level with domestically focused Kroger and Target.
Wider distaste for emerging markets is partly to blame. The MSCI emerging markets index has underperformed the S&P500 over one, three and five years. So bold moves into these markets, however good the prospects, are unlikely to go down well. That leaves the likes of Tesco and Walmart to either get out entirely, and admit they cannot turn the potential of China and India into sustainable profits, or fiddle with the model until they find something that works.
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