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December 5, 2007

All eyes on Tesco’s American dream

The stakes are high for Tesco as it embarks on its US adventure. The UK retail giant is just weeks into its foray into the US and, so far, the signs for its Fresh & Easy business are positive. But can Tesco succeed where others have failed? Dean Best reports.

By Dean Best

The stakes are high for Tesco as it embarks on its US adventure. The UK retail giant is just weeks into its foray into the US and, so far, the signs for its Fresh & Easy business are positive. But can Tesco succeed where others have failed? Dean Best reports.


Tesco’s entry into the US has been perhaps the most significant strategic move in global retail this year.


The company has already proved it can run successful businesses outside the UK. A quick look at its latest figures – issued yesterday – show that Tesco has proved adept at driving growth in markets from Thailand to Turkey.


However, Tesco’s overseas forays have largely been in emerging markets, countries where the rules of the game are yet to be defined. This year, the company has ventured into the US, a far more mature market and one seen as a retailer’s graveyard after the failures of Marks & Spencer and Sainsbury’s in the 1980s and 1990s. The sheer size of the market and the level of competition in US retail have left many industry watchers wondering whether Tesco can succeed.


Tesco CEO Sir Terry Leahy wants to drive further expansion overseas. He wants to see half of Tesco’s business coming from outside the UK within a decade. To meet that goal, Tesco will have to double its non-UK sales. The US, Sir Terry’s latest target, represents a high-risk move – but also one that could yield high rewards.


Tesco has gone into the US with a brand new concept – dubbed Fresh & Easy – and is looking to give local shoppers something new. A typical Fresh & Easy outlet is, at around 10,000 square feet, smaller than a typical US supermarket. “Our objective is to produce a local neighbourhood store committed to providing fresh wholesome food at affordable prices,” says Tim Mason, the man in charge of the Fresh & Easy business.


Behind that over-arching objective is a quiet confidence that the company can buck the trend and succeed in the US. Tesco has already opened 15 outlets in Las Vegas, San Diego, Phoenix and Los Angeles and is aiming to have 200 stores in the US by 2009. The company is already looking at sites for new stores in San Francisco and northern California and is also planning to build a second distribution centre to feed that expansion.


Ben Miller, international programme manager for retail analysts IGD, “fundamentally believes” Tesco can build a successful business in the US. “Tesco is doing something different,” Miller says. “It is not coming in through acquisition and buying into the legacy of a store portfolio.


“The US is a market where there is a big void between 2,500 sq feet, Seven-Eleven-style, ‘Cokes and smokes’ stores, which are not really about a fresh food proposition, and standard supermarkets of 40,000 sq feet. It is incredibly interesting what Tesco is doing out there.”


Indeed, it is hard to find a negative word about Tesco’s move into the US. Analysts have been impressed with Tesco’s “compelling” and “top-notch” strategy, priase, one could argue, that bodes well for the business.


Clive Black, of UK investment bank, Shore Capital believes Tesco has got the “right infrastructure in place” for Fresh & Easy to succeed, although he cautions that it remains “very early days”. He adds: “All the ingredients are there for it to be a tremendous success. But, there will be a question over the novelty versus the durability of the Fresh & Easy proposition.”


One question mark over Tesco’s strategy is over the amount of own-label products sold in store. A Fresh & Easy outlet currently sells around 3,600 SKUs and of that around 50% is own-label, a proportion much higher than a typical US supermarket. “It is an important issue,” Black says. “Once the dust settles and the novelty wears off, it will be interesting to see whether the US consumer takes to own-label. The US consumer is quite a sophisticated consumer and is very brand-oriented.”


Tesco is itself building a new brand in the US and it will take time for consumers to trust the Fresh & Easy concept. “In terms of accessibility to neighbourhoods, Fresh & Easy has a very good proposition,” Black says. “US consumers are also very price-conscious, and Fresh & Easy undoubtedly ticks the boxes in terms of value. But, there will be a question over brand loyalty.”


Neil Sanders, of retail analysts Verdict Research, agrees Tesco needs to play a long game to build the Fresh & Easy brand. However, he argues that US shoppers will come to trust the business, which will help alleviate the concern over Tesco’s emphasis on own-label.


“It will require a degree of re-education. Fresh & Easy is a new brand; once consumers know what to expect, the barrier to buying own-label products will become marginal. Over the long-term, it will not be a hindrance to genuine customer interest.”


Tesco’s foray into the US has not been without its problems. The company has faced criticism from local unions and last week an environmental ruling threatened to delay its planned expansion of Fresh & Easy across California. Sanders describes these issues as “teething troubles”.


He says: “Tesco has got to be given time; it has only just gone in. Tesco is a company that is notorious for doing its homework. Anything that the company hasn’t adhered to will be relatively minor and easy to remedy. The US is a new market for them and there will be teething troubles and there will be mistakes.”


In February last year, when Tesco announced its plans to enter the US market, much of the City thought the company was making a mistake. A big one. Shares in the company dipped as investors baulked at the prospect of Tesco entering the bear-pit of the US retail market.


Now, however, the view of Fresh & Easy is one of cautious optimism. “The optimism is based on the potential that Tesco is doing something different,” Miller says.


To coin a phrase from one Tesco’s fierce local rivals, the retail giant will no doubt be hoping that US consumers do indeed try something new.

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