Will Tesco succeed in the U.S?

The British are coming

Tesco Group is UK’s biggest retailer and operates more than 2,500 stores in the UK and 12 other countries in Europe and Asia. For years, Tesco had plans to enter the U.S. retail market. It was believed that Tesco even looked into possibly acquiring key parts of the Albertson's grocery chain. But finally, Tesco announced that it would enter the US by 2007 and that its new stores would be based on its "Tesco Express" convenience store model. Tesco operates four different retail formats – Tesco Express, Tesco Metro, Tesco Supercenters and Tesco Extra. Tesco Express is a smaller store format of up to 3,000 sq. feet.

At the time many analysts predicted that the coming of Tesco - even though a new player was a quite accomplished retail entity - had the ability to impact the U.S. market over the long term. To the conventional supermarket channel and even Wal-Mart, Kroger, and Safeway it could only be viewed as a negative. For the traditional supermarket chains who were already struggling to compete with Wal-Mart and the growing popularity of organic food stores like Whole Foods (and other premium food chains), the competition was only going to get worse.

Taking on Wal-Mart

Tesco was serious about expanding into the U.S. as indicated by its initial plans to spend $400 million a year to build its U.S. stores. This investment could pay for 100 to 150 stores. It aims to build 1,000 stores in the US eventually. Tesco chose to enter U.S. through the West Coast first because that region of the country is not yet dominated by Wal-Mart. Like Wal-Mart, Tesco is nonunionised. Wal-Mart is planning to test similarly sized new grocery stores under the "Marketside" banner in the Phoenix area later this year.

Success of Tesco's launch in the US?

There was growing speculation that the initial performance of Tesco’s new Fresh & Easy discount grocery stores concept was not up to the mark and that internal sales targets were not being met. Some reports in the US suggested that the small neighbourhood groceries, similar in concept to an Aldi hard-discount store, have been failing to attract customers at the rate needed. (The hard discount store, pioneered by Aldi, is a small outlet with only 700 to 1,000 lines of stock compared with 100,000 in a big Wal-Mart. The shelves are mostly filled with own-brand goods.)

Even competitors like Stater Brothers, a supermarket chain in south California (and where the first 20 Tesco stores opened) felt almost no impact from Tesco. The Fresh & Easy concept was being questioned. Fresh & Easy had claimed to be up to 25 per cent cheaper than its main supermarket competition and had expectations of average sales to reach $200,000 per store per week.

Will Tesco succeed in the U.S?

A spokesman from Tesco however maintained that its failure claims were “a bit ridiculous, given that we only opened four months ago”. Tesco is continuing to push ahead with its ambitious US store plans, with another 150 stores expected to open over the coming year in its initial markets. The group has committed £1.25bn ($2.48bn) over five years to its US expansion plans. It is signing leases on additional store sites in northern California, where it is also planning to open a second large distribution centre outside Stockton.

In the past, retailers from the UK like Marks & Spencer, Next, Dixons, and Sainsbury’s have all tried to expand in the US and failed. Tesco has already made the first change to its executive management team at Fresh & Easy. Jeff Adams is heading back to US. He was the chief executive of Tesco’s Lotus business in Thailand. He will be second-in-command to Tim Mason, Fresh & Easy’s chief executive. Meanwhile, Tesco has other things to worry about in its home UK market after it was accused of setting up an elaborate offshore tax avoidance scheme.

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