P AST , C URRENT , AND F UTURE J OURNEY OF T ESCO IN THE U.S. M ARKET Tesco is a
ID: 435101 • Letter: P
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PAST, CURRENT, AND FUTURE JOURNEY OF TESCO IN THE U.S. MARKET
Tesco is a British multinational grocery and general merchan- dise retailer headquartered in Cheshunt, United Kingdom. It is the third-largest retailer in the world measured by revenues (after Wal-Mart and Carrefour) and the second-largest mea- sured by profits (after Wal-Mart).
In 2007, after years of studying the U.S. market, Tesco launched its Fresh & Easy Neighborhood Market concept in the United States. This was the first time Tesco entered an inter- national market organically rather than through acquisition or joint venture, thus representing potentially the most signifi- cant retail invasion of the U.S. market. Most of the company’s stores are from approximately 10,000 ft2 and are designed to offer high-quality, fresh food at competitive prices. As part of the convenience concept, stores have around 3,500 SKUs including chilled ready meals, snacks and salads, ready-to-heat prepared meals, baked goods, fresh produce, meat, poultry, seafood, juice, and coffee. Prepared foods account for around 10–15 percent of the product range, while private label prod- ucts account for around 50 percent of the lines. Fresh & Easy does not offer a loyalty card program despite the fact that loyalty cards are very popular with American shoppers.
In terms of store layout, Tesco’s Fresh & Easy does not fol- low the traditional “racetrack,” making the store layout feel much more European than American. Perishables and ready meals are positioned near the entrance while ambient and frozen (i.e., products with a longer shelf life) are placed toward the back of the store. Upon entering the store, customers are faced with a limited but impressive range of produce. The merchandising is strikingly similar to a Tesco Express in the United Kingdom where produce is generally placed near the store entrance.
Prepacked produce is common for Tesco but not for U.S. grocers. Organic products are featured throughout the store, primarily under the Fresh & Easy label. Eggs are merchan- dised the American way—in coolers—as opposed to being placed on the shelf, as they are in Europe. Fresh & Easy products aim to be free from artificial coloring, flavoring, and preservatives. As a result, they tend to have a much shorter shelf life than products found in a typical U.S. supermarket. Perhaps as a sign of its British roots, Fresh & Easy offers a decent selection of cheddar cheese, and milk is 100 percent private label, a stark contrast to typical American chains.
The ambient section is both designed and merchandised in a very similar fashion to that of a warehouse club, with wide aisles, high ceilings, and natural lighting. Signage is used throughout the store to convey Fresh & Easy’s credentials as a sustainable retailer. Shoppers are encouraged to use the self-checkout; however, an attendant is always available to check out shoppers who do not wish to do self-checkouts. The aim of utilizing self-checkouts is to move customers through the store quickly and reduce staff costs.
Tesco has struggled in the U.S. market, forcing the com- pany to delay its plans to grow rapidly in California, Nevada, and Arizona. Three years later after its 2007 entrance, the company had around 175 stores in the United States but was still losing money. To mitigate these losses, in 2011, Tesco tested smaller-format stores in the U.S. market with a trial of a small number of stores at 3,000 ft2—branded as Fresh & Easy Express—that will allow the retailer to open in areas where there is insufficient space for larger formats. The plan to try a smaller-store format in the United States comes on the back of a successful push into the convenience-store format in the United Kingdom in recent years.
Recently, Tesco admitted that the 4-year-old chain in California, Arizona, and Nevada was making “slower progress” than planned. Only 30 out of 186 stores are prof- itable, while 118 are “very close,” Chief Financial Officer Laurie McIlwee said. Tesco would need 300 stores in the United States to break even. The revised expansion plan means Tesco’s Fresh & Easy will have just 230 stores by February 2013. Tesco needs to increase its scale in the United States to absorb the cost of running its own manufacturing and distribution center in California. Having fewer outlets than planned may impede its intention to break even.
Sources: www.planetretail.net; Kathy Gordon and Simon Zekaria, “Tesco to Test Smaller Stores In the U.S.,” Wall Street Journal, August 3, 2011; Sarah Shannon, “Tesco Reluctance to Commit to U.S. Dims Investor Outlook”, Bloomberg News, April 18, 2012; and Mark Potter, “Tesco to Outpace Growth at Global Rivals,” Reuters, February 16, 2011.
DISCUSSION QUESTIONS
1. Analyze Tesco’s retailing strategy in the United States. What do you think has gone wrong in its Fresh and Easy strategy?
2. Do you think the U.S. market loss is as a result of its U.S. retailing strategy? Or are there any more strategic issues? Please explain your answer.
3. Using your understanding about international retailing as described in this chapter, what would you suggest to Tesco’s chief officer in pursuing its international retail expansion?
Explanation / Answer
1
2. Strategic issues
3 International retail expansion
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