Last week – to much fanfare – Tesco (TSCO) 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 US are expected to be £6.9bn within five years. But can Tesco succeed where so many others have failed?
As retail analyst Neil Saunders of Verdict Research puts it, the US is known as “a graveyard for British retailers”. The list of firms that have crashed and burned there reads like a who’s who of UK retail; Laura Ashley (ALY) (sold its US unit for just $1), WH Smith (SMWH) (losses of $50m) and Body Shop (whose US adventures nearly bankrupted the whole group), are just a few of the casualties.
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 US team, headed by former group marketing director, Tim Mason, have done their homework. They have watched the US “for 20 years” and spent the last two getting into the heads of Californian consumers by sending executives to live with US families. Then there is Tesco’s vast experience of international retail – more than half of its selling space is now overseas, meaning “its adaptability to different business models should be that much sharper”, says Derek Harris of Golley Slater.
Perhaps most importantly, Tesco thinks it has spotted a gap in the US market, similar to the one it has filled here 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 harassed workers in the UK, but a novelty in California.
But novel as some of these ideas may be, as Chris Ayres says in The Times, “there’s a culture problem. A big one.” 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 UK retailer Marks & Spencer 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, minimise environmental impact and set up in underserved areas.
But most importantly, the timing is dreadful. The US 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 $86bn, Tesco isn’t going to be brought to its knees by failure in the US. But we suspect it will be a long time – if ever – before US consumers are complaining that Tesco is taking over their country.