Tesco Takes On U.S. Shoppers

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Taking Tesco to Task

The company hopes to keep prices low by selling big volumes of those few chosen items and relying on trusted suppliers, some of which it brought from Britain to the U.S. To lower distribution costs, Tesco is clustering its stores in urban markets that it can supply quickly from a giant new distribution center it has built in Riverside, Calif., about an hour's drive east of Los Angeles.

But while Tesco may be trying to keep things simple, nothing in life ever is. A group of union and community activists called the Alliance for Healthy & Responsible Grocery Stores wants the company to commit to more specific employee-compensation, environmental, and inner-city store targets. In August, the Urban & Environmental Policy Institute at Occidental College took Tesco to task for only locating 10% of the stores announced so far in poor neighborhoods. Union members even wore Minutemen outfits to a grocery industry event in September to protest Tesco's British invasion.

"If you drive through the corridors that I pass through, they are bereft of quality grocery stores," says the Reverend Norman Johnson, a pastor in largely African-American south Los Angeles. "This is an opportunity for a community that has a history of broken promises."

Open to Environmental Concerns

Tesco, for its part, says it has already promised to pay wages starting at $10 an hour, plus benefits, and to source more than 60% of its products locally. It also aims to open stores in what it calls "food deserts." Uwins is particularly vehement on this point. "We're out every week scouting for new store locations," he says. "We're going to welcome all types of households and all different income levels."

The company also is taking environmental and neighborhood concerns seriously, agreeing to reduce energy use by 30% compared with a typical grocery store and not to use loud shipping trucks at night, a lesson it learned from the urban Express and Metro stores it operates in Europe. "Tesco is taking a very hard green approach in the U.S.," says Mohan Sodhi, professor and head of operations management at Cass Business School in London. "They are even using polar bears as a mascot."

Competitors already seem to be getting prepared. Retail giants Safeway (SWY) and Kroger (KR) have been remodeling their Los Angeles supermarkets recently, adding upscale coffee bars and more organic food offerings. Asked during an Oct. 11 earnings call about the threat from Tesco, Safeway Chairman Steven Burd said he thought it would be difficult for the company to make enough money with smaller stores.

Overseas Track Record

"[Online grocer] Webvan was going to destroy the conventional supermarket," he said, reflecting on previous putative rivals to Safeway. "Costco (COST) was going to affect us, and then Wal-Mart (WMT). We just have another competitor coming in to see if they can take advantage of a niche."

While previous stateside excursions by British retailers such as grocer J. Sainsbury (SBRY.L) and department store Marks & Spencer (MKS.L) flopped, Tesco has a track record of operating multiple store formats in many markets. Even Wal-Mart Stores, which owns the Asda retail chain in Britain, perennially plays second fiddle to Tesco there.

The British chain, which began expanding overseas in the late 1990s, now operates in a dozen countries that generate about one-fifth of its sales and profits. Says Dina Roldan, a consultant with the research firm TNS Retail Forward, "They're very good at merchandising in a compact space." Now it's show time.

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.
With reporting by Kerry Capell in London.