Global Economics

Tesco Takes On U.S. Shoppers


The British retail giant is bringing its concept of midsize, urban grocery stores to the Southwest. After all the research, can it succeed stateside?

They're hoisting the friendly green and white signs, plugging in the energy-efficient refrigerated cases, and training the checkout clerks. One of the most closely watched new grocery-store concepts in decades will be unveiled on Nov. 8 when British retail giant Tesco (TSCO.L) opens the first six of its new Fresh & Easy Neighborhood Markets in the Los Angeles area.

It's a big gamble, even for Tesco, which books $86 billion a year in revenue. The company, the largest retailer in Britain and among the largest supermarket chains in the world, already has announced 122 planned store locations in Phoenix, Las Vegas, and Southern California. It has committed to invest $2 billion over the next five years on the venture.

But before the first outlet is even open, local unions and community activists are pressuring the company to live up to its promises—including paying decent wages, minimizing environmental impact, and locating stores in underserved areas. Tesco also must stare down the ghosts of previous, failed attempts by British merchants to cross the pond. "The U.S. is regarded as a graveyard for British retailers," says Neil Saunders, director of Verdict Research, a London-based consultancy. "They've had to withdraw with egg on their faces."

Customers the First to Know

Tesco's effort has been cloaked in secrecy. The company set up a mock grocery store in a Los Angeles warehouse and trotted in more than 200 would-be shoppers to give their opinions, posing as Hollywood producers constructing a movie set. Tesco has refused media requests to see the model store or tour any of the shops presently under construction.

It isn't sharing many specific details about pricing and products either. "I'd rather our customers were the first to find out how great our prices are," says Simon Uwins, a 23-year Tesco veteran serving as chief marketing officer for the new venture. "You'll have to wait and see."

Here's what Tesco has let out so far. Fresh & Easy stores will each be 10,000 square feet—roughly four times the size of a typical convenience store and one-third as large as a traditional supermarket. This mimics the format of the chain's highly successful Tesco Metro outlets in Britain, which dot the country in urban locations too small to support a full-size supermarket.

Shopping with Americans

Taking cues from consumers who said they were overwhelmed by choices, Fresh & Easy will offer an edited assortment of items—everything from freshly bottled fruit juices to detergent—at prices lower than convenience stores. At the center of each outlet will be a space called Kitchen Table, where customers can sample products. "It's something like a Whole Foods (WFMI), but with more competitive prices," says Deloitte & Touche retail consultant Ira Kalish.

Tesco began plotting the launch in 2005. The company dispatched Tim Mason, head of its pace-setting online operation, Tesco.com, and the mastermind of Tesco's well-regarded loyalty card program, to oversee the venture. Mason and his team spent months shopping with consumers, poking around their pantries, and watching them prepare meals. What they found was that Americans often go to several different stores a week—a supermarket for meat and cereal, a specialty grocer for produce, a warehouse store to stock up on detergent and paper towels, and a convenience store for milk and ice cream.

"We heard a fair amount of frustration," Uwins says. "That products weren't fresh, or affordable, or that they had to travel far to get them." The strategy was crystallized by one mock shopper who, while walking the aisles of the model store, asked: "Why do I have to choose between 15 different types of tuna? Tuna is tuna."

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.


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