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Attention No Shoppers

The rise and fall of Tesco in China.

Tesco's experience in China is an exception to the quote, attributed to Woody Allen, that "80 percent of success is showing up." On Oct. 3, the British supermarket chain Tesco confirmed it will join with the state-owned behemoth China Resources Enterprise (CRE) to merge their supermarkets in China. By combining Tesco's 131 outlets with CRE's 2,986 far smaller Vanguard stores across mainland China and Hong Kong, the venture would create China's biggest multiformat food retailer, with sales of roughly $15 billion. While this represents a victory for CRE, it's hard to see it as anything but a defeat for Tesco, which gets just 20 percent of the joint venture.

Measured in profits, Tesco is the world's second-largest retailer, after Wal-Mart, though unlike its competitor Tesco also specializes in food retail and community supermarkets. Tesco has been trying to crack the Middle Kingdom's grocery market for a decade now -- this looks like the end of the story, "a humiliating retreat for the British retail giant," said an op-ed in the usually optimistic state-run newspaper China Daily. "[R]ather than representing part of any coherent strategy, [the sale] appears to be an attempt to limit losses." It's an ignominious end for a company whose involvement with China stretches back almost a century.

The House of Tesco was built on British demand for a once-exotic Chinese product: tea. Jack Cohen, a trader in London's East End, founded the company just after World War I. In 1924, buying a chest of Chinese tea from the supplier T.E. Stockwell, Cohen decided that the first three letters would do just fine (the next two letters come from his last name). Since the Cohen days, Tesco's strategy has been to buy in bulk in order to sell at a discount -- or in British parlance, to "pile 'em high and sell 'em cheap." From that small beginning, Tesco grew to be Britain's largest supermarket chain, with stores in 12 countries across North America, Europe, and Asia, visited 75 million times a week. By the early years of the 21st century, Tesco had roughly 3,000 stores in Britain -- so ubiquitous that British commentators who feared its market dominance called it the Tescopoly.

With the company a king of the grocery world, a nation of just over 60 million customers could not contain Tesco. After the fall of the Berlin Wall in 1989, Tesco moved into Eastern Europe, building over 1,000 stores across the Czech Republic, Hungary, Poland, and Slovakia. As Southeast Asia boomed in the early 1990s, Tesco opened approximately 1,500 stores in Malaysia and Thailand. In the early years of the 21st century, Tesco looked to China, where an emerging consumer market craved Western products and novelties, like barcoding, shopping carts, and loyalty cards. The market seemed ripe: GDP was growing at double-digit rates, urbanization was accelerating, and for the first time in communist China's history, a segment of white-collar workers started finding themselves cash rich and time poor.

China's nascent middle class had begun flocking to glittering new produce emporiums, perusing shelves of tantalizing goods and sampling new kinds of cheese, yogurt, and pastries. They marveled at the never-seen-before fantastical inventions: microwavable spaghetti Bolognese and Triple Double Neapolitan Oreos; freezer cabinets stuffed with yakitori chicken dumplings and Häagen-Dazs green tea hibiscus ice cream; aisles neatly bursting with boxed cabernet sauvignon and resealable packs of Swiss Alpine muesli. These shared space with the displays of everyday essentials such as cooking oil and instant noodles, piled high and selling cheap.

Tesco opted for the traditional British strategy, as old as the Empire itself, of "divide and conquer": penetrating with stealth and using foreign forces to launch their opening salvos in this new battlefront. In 2004, Tesco purchased a 50 percent stake in Hymall, a Taiwanese supermarket chain; the company upped it to 90 percent in 2006. By testing the waters through Hymall, Tesco could preserve its core brand image. If the business was less than expected, then Tesco could retreat, with no direct loss of brand prestige, and try again.

At least, that was the idea. But by waiting on the sidelines in the early 2000s, Tesco missed the golden age for supermarket expansion in China. Chinese shoppers were coming to prefer the vast new food palaces, while the government encouraged the chains to expand so they could create jobs and pay taxes. The explosion of car ownership -- more than doubling from 2002 and 2006 in China to 28 vehicles per 1,000 people -- meant that Chinese consumers could more easily visit 10,000-square-foot emporiums sprouting up on the outskirts of cities. Chain retail began dominating, forcing the consolidation of Chinese mom-and-pops and small regional brands. In the late 1990s, Shanghai alone granted nearly 200 permits for supermarkets and hypermarkets, when the city's own five-year plan had called for an optimistic maximum of 120. By mid-decade, the potential customer base got spread thinner, and supermarket operators' margins suffered. According to a report by McKinsey, a consultancy, annual revenue growth for supermarkets in China between 1997 and 2003 averaged around 70 percent -- from 2004 onward, it dropped to roughly 20 percent.

By the time Tesco decided to send in the boys from London in 2007, competition was far more intense. The French hypermarket chain Carrefour, slightly smaller than Tesco globally in terms of profits but slightly larger in terms of revenue, had planted its flag in nearly all of China's 22 provinces, with over 100 outlets; by 2007, Wal-Mart had more than 70 stores across China.

At this stage Tesco began, as breathless China coverage invariably says about foreign brands, to expand "very aggressively." In 2007, when it unveiled its Chinese name -- Le Gou, or Happy Shopper -- it had 32 stores. That grew to 56 stores in 2008 and to over 130 stores today.

They introduced the Tesco Clubcard, a popular loyalty card that, unlike the ones provided by Chinese retailers, actually let customers accrue points convertible to cash discounts on every purchase. They localized their product offerings -- kimchi instant noodles, seaweed crackers, ginseng sodas -- and introduced their own brands of frozen and organic foods, successful in other markets. They tried e-tailing, in-store bakeries, even their own clothing brand. But profits have been hard to come by. Tesco China's first-quarter 2013 same-store sales declined 4.9 percent, even worse than its fourth-quarter 2012 drop of 2 percent. In November 2012 Tesco began closing stores; by May it had shut five. In August Tesco confirmed it was in talks with CRE and looking for a way out.

What does this mean for Tesco? It's not all grim globally: In Thailand, Turkey, and Malaysia, Tesco has largely been succeeding. And Eastern Europeans appear to have decided they love Tesco almost as much as the Brits do: In Hungary Tesco is now the country's third-largest employer, while Poland Tesco's 446 stores serve more than 5 million customers per week.

Perhaps they'll write China off as a small blip on the long road to building an empire. Of late, it's been a rocky one: Tesco pulled out of operations in France in 2010, closed its business in Japan in 2011, and in September 2013, sold the U.S. chain Fresh & Easy -- at a loss of nearly $1.9 billion.

But Tesco is not fully withdrawing from China. Although CRE's brand name will be on the storefronts, Tesco's label, via its food products, will at least still be on Chinese shelves. In the end, the problem wasn't the Chinese -- they loved shopping in Tesco. When every supermarket chain in the world has the same idea, 1.4 billion people just isn't enough.

GUANG NIU/Getty Images

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Every weekend, Longform highlights its favorite international articles of the week. For daily picks of new and classic nonfiction, check out Longform or follow @longform on Twitter. Have an iPad? Download Longform's new app and read all of the latest in-depth stories from dozens of magazines, including Foreign Policy.

The Shadow Commander, by Dexter Filkins, the New Yorker

Qassem Suleimani is the Iranian operative who has been reshaping the Middle East. Now he's directing Assad's war in Syria.

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Jailed in Iran: The Story of ex-Marine Amir Hekmati, by Azmat Khan, Al Jazeera English

The story of Amir Hekmati, the Iranian-American and former Marine who has been imprisoned in Tehran for more than two years.

It was Amir's first trip to Iran, motivated, his family says, by a love of travel and a desire to see his aging grandmothers. That day, two weeks into his trip, Amir called up his mother Behnaz back in Flint, Mich., to tell her how excited he was to be in Tehran. He hung up promising to call again later to tell her how it went.

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The next day, worried family members went to the family home where he was staying and found muddy footprints but no sign of Amir.

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Why I Have Gone on Hunger Strike, by Nadezhda Tolokonnikova, the Guardian

In an open letter, the imprisoned Pussy Riot member explains why the brutal conditions at Penal Colony No. 14 have led her to undertake a hunger strike in protest.

Beginning Monday, 23 September, I am going on hunger strike. This is an extreme method, but I am convinced that it is my only way out of my current situation.

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Can a Gay, Catholic Leftist Actually Squelch Corruption in Sicily? by Marco De Martino, the New York Times

The Sicilian President aims to reform the excess and graft that define one of the world's most notoriously corrupt regions.

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Days after he took office last December - having been elected on the ballot of the political movement he co-founded, the Megaphone - Crocetta fired his predecessor's 21 press officers. He then took aim at about 250 of the trade schools after proving that some were operated by the chauffeurs of regional politicians. When he greeted me for the first time, he proudly announced that he had discovered even more waste: "The region looks after about 800 exotic birds," he said, "spending astronomical sums every year - as much as 500,000 euros. It's time to stop!"

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The Spies Inside Damascus, by Ronen Bergman, Foreign Policy

The Mossad's secret war on the Syrian WMD machine.

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In 1998, the Mossad learned details of some of these transactions. Israeli Prime Minister Ehud Barak tried to warn the heads of the government in Moscow about the general's doings in meetings he held with them in 1999, but to no avail. It seemed as though Yeltsin could not, or would not, intervene. When the Israelis saw that their pressure was not working, Mossad agents in Europe were assigned to pose as independent researchers working on the background for a documentary film on gas warfare. They repeatedly contacted high-ranking officials in the Kremlin and the Russian army and said that according to their information, Kuntsevich was selling chemical warfare agents to Syria. The goal was to scare Moscow into believing that the information was about to be made public. Unfortunately, this didn't work either, and apart from a stern warning, nothing was done to curb the general.

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