Europe’s largest retailer Carrefour was already struggling to pressure its Chinese partners to close a deal, first announced more than a year ago, for its faltering Chinese business. But now German rival Metro’s concurrent Chinese auction is piling on the pressure.
The French retailer signed a terms sheet in January 2018 outlining plans for Shenzhen-headquartered social media giant Tencent and Fuzhou-based supermarket chain Yonghui Superstores to invest in its China business.
Crucially, however, it did not nail a price or the size of the stake before making the announcement.
In hindsight, this looks like a potentially major blunder because since signing the preliminary agreement, talks have faltered.
Tencent and Yonghui have held out for favourable terms while Carrefour’s sales in China continue to slide, according to people familiar with the matter. And the Chinese appear to have the upper hand in negotiations as Carrefour does not want to have to tell its investors that the suitors have walked away from the deal after making their talks public, according to one of the people.
Yonghui, in which Tencent owns a stake, has even expressed interest in the auction of a majority stake in German food wholesaler-retailer Metro’s China business, say multiple market sources, which could yet replace a deal with Carrefour.
Metro's and Carrefour’s restructuring of their businesses in China comes at a time of significant disruption for big-box retailers globally, as online competitors offer customers more choice and the convenience of shopping from home.
China has been synonymous with a new retail trend for the last decade, where digital and bricks-and-mortar stores combine to offer the choice of browsing physical stores with the option of ordering online, cashless payments and home delivery.
Local brands are also often able to innovate faster compared with foreign companies that often need to go through a multi-layered approval process before launching a new product.
So as sales have continued to drop at foreign businesses in China, several multinationals have retrenched or sought to restructure their businesses while some value remains.
The US’s Home Depot closed its big box stores across China in 2012 while Britain’s Tesco sold control of its business in China to China Resources in 2013, with the state-backed firm agreeing to fund the joint venture’s investment costs. In 2015, China Resources posted its first annual loss in two decades, partly blaming competition from e-commerce.
Other traditional retailers have teamed up with their online local counterparts to build an omni-channel presence and deploy big-data analytics. Wal-Mart, the world’s largest retailer, sold its online presence to JD.com in return for a 5% stake in the second-largest Chinese e-commerce company after Alibaba. Meanwhile, France’s Groupe Auchan teamed up with Alibaba and the Taiwanese conglomerate Ruentex to revamp Chinese hypermarket operator Sun Art in 2017.
In 2018, the total value of M&A transactions in China’s retail and consumer sector was about $59 billion, up 48% on the previous year, according to Thomson Reuters, China Venture and PwC.
“Despite ongoing trade uncertainties, China is still one of the most important consumer markets in the world ... Overseas strategic investors will continue to seek out these opportunities and to realise their China strategies through enhanced cooperation with local companies,” said WaldemarJap, PwC consumer markets deals lead partner, in a report released on Wednesday.
To be sure, Carrefour is fighting back, making self-check-out with payment through facial recognition available in all stores since mid-April. But sales at the French retailer continue to slide.
Carrefour’s China net sales fell 10% to €3.646 billion ($4.1 billion) in 2018 from a year earlier. Metro did not break out figures for its China business in its annual results but its sales in Asia sales dipped 1.4% to €4.298 billion.
Carrefour’s China business is worth about €1 billion euros while Metro’s could fetch €1.7 billion to €2 billion, investment bankers contacted by FinanceAsia estimated.
Metro’s auction of its majority stake in its China business has already collected second-round bids and will likely select one or two to enter into more detailed negotiations within the coming weeks, according to market sources. The auction has been very competitive so far; out of a large field, Metro has whittled down its list of suitors to about five bidders including a consortium comprising Yonghui and private equity firm Hillhouse, which revamped footwear retailer Belle International, as well as Wumart Stores.
The person familiar with the negotiations said that Boyu Capital and China Vanke were no longer in the race.
“Metro will now significantly narrow the list of partners for further talks,” a company spokesperson said. Carrefour’s press relations team did not respond to an emailed request for comment.
In a desperate attempt to bring Tencent and Yonghui to the table and to claw back some negotiating leverage, Carrefour earlier this year asked investment bankers at HSBC to discreetly sound out other potential bidders for its China business, the person familiar with the matter said.
However, prospective suitors were concerned about Carrefour China’s soft sales, about going up against Tencent, which has formidable financial resources, as well as potentially wasting time if Carrefour was using them as a stalking horse and finally. They were also put off by the idea that Tencent and Yonghui, in all probability, were better placed to turn around Carrefour’s struggling China business, the person said.
Tencent is gradually penetrating all aspects of traditional retail. In addition to advertising, customer management, and interactive applications inside and outside the store, it also cooperates with Chinese retailers in the supply chain, warehousing and procurement. Over one billion people use Tencent’s WeChat, and WeChat Pay has more than 800 million monthly users.
Carrefour’s tactic of sounding out the market was successful in one crucial respect, it has reinvigorated the talks with Tencent and Yonghui, said one of the people, but there are still some sticking points that both sides have to work through such as the future of Carrefour’s staff in its Chinese operations.
Metro has, arguably, done Carrefour one favour: it has drawn out potential suitors for retailers in China, one of which may be more suited to Carrefour’s business.