Start the conversation
Tesco, England's Wal-Mart and the world's No. 3 food retailer, just opened its first six stores in California. An ambitious 800 more are planned to open in the U.S. by 2012. Could this supermarket giant be America's saving grace or the next David Beckham-style crash and burn? Tim Bennet from our U.K. affiliate MoneyWeek Magazine reports.
Last week – to much fanfare – Tesco PLC (TSCDY) crossed the Atlantic, opening six new stores under the "Fresh and Easy" brand name in California. The supermarket aims to open another 50 stores within the next six months, then have 800 up and running by 2012. Sales from the U.S. are expected to be $14.1 billion within five years.
Sounds like another David Beckham situation – a much-hyped U.K. retail arrives in Los Angeles to discover America, as retail analyst Neil Saunders of Verdict Research puts it, "a graveyard for British retailers."
The list of causalities reads like a who's who of U.K. retail: Laura Ashley (sold its U.S. unit for just $1), WH Smith (losses of $50 million) and Body Shop (whose U.S. adventures nearly bankrupted the whole group). It's a daunting list – but analysts seem to think that if anyone can pull it off, Tesco can.
For a start, Sir Terry Leahy and his U.S. team have done their homework. They have watched the U.S. "for 20 years" and spent the last two getting into the heads of Californian consumers by sending executives to live with U.S. families. Then there is Tesco's vast experience of international retail – more than half of its selling space is now overseas, meaning it's able to adjust and adapt to new business models.
Perhaps most importantly, Tesco thinks it has spotted a gap in the U.S. market, similar to the one it filled in England with its "Metro" stores. Californian food shoppers currently have to choose between vast out-of-town shopping warehouses, such as Wal-Mart or expensive convenience stores with limited ranges. Tesco thinks that Fresh and Easy will sit in the middle, with a wide but not overwhelming range of consumer staples at competitive prices. The group also hopes to pioneer "ready meals" – a concept well known to workers in the U.K., but a novelty in California.
But novel as some of these ideas may be, "there's a culture problem. A big one," says Chris Ayres in The Times. Residents of "the most diet-fixated, carbohydrate-obsessed city on earth" are likely to need a lot of convincing before they take to microwaving ready meals.
And Tesco's experience in less-developed markets, such as China and Eastern Europe, may not count for much in the world's most sophisticated market, as veteran U.K. retailer Marks & Spencer Group Plc (MAKSY) discovered with its ill-judged Brooks Brothers foray back in the 1990s. Even if the strategy does work, as BusinessWeek points out, the company is finding that local unions will readily take action at the first sign of broken promises to pay good wages, minimize environmental impact, and set up in underserved areas.
But most importantly, the timing is dreadful. The U.S. economy is in the midst of a housing crash – hardly the best time to be tempting budget-conscious consumers to a new shop. With global sales of around $86 billion, Tesco isn't going to be brought to its knees by failure in the U.S. But it's a safe to assume it'll be a long time – if ever – before U.S. consumers are complaining that Tesco is taking over their country.
News and Related Story Links:
- Money Morning:
Wal-Mart Faces New Global Rival in its Home U.S. Market
- Money Morning:
The Week That Was: Team Bernanke and Interest Rates Have U.S. Economy Headed in the Wrong Direction