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Tesco faces fresh US threat

Created:
24 October 2007
Updated:
25 October 2007
Written by:
Nathalie Olof-Ors

After months of preparations, Tesco will open its first Fresh and Easy stores in the US in the next two weeks. And analysts will closely monitor its early progress in this new chapter of its international expansion. This latest international move, however, raises the bar for Tesco as the highly competitive American market has already been a graveyard for several European retailers' ambitions.

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Despite such cautionary tales and concerns over US consumer spending, some analysts are impressed by Tesco's meticulous approach. "The group has collected a vast database of American consumer patterns," says Seymour Pierce analyst Andrew Wade. "And while there are admittedly serious competitors in the green retail segment, heath and environment is certainly on the Californians agenda and Tesco's proposition certainly makes sense. So even in the worst case scenario, we don't expect this US expansion to be a disaster. The surprise in my opinion is more on the upside."

But, analysts think there are also substantial risks. Tesco is trying to establish a small store format unknown to American shoppers. So there is a question mark over consumer response, while the decline in US consumer confidence adds another uncertainty.

One thing for sure though is that local retailers will not go without a fight. Rumours suggest that Tesco's old rival, Wal-Mart, is planning to roll out its Neighborhood Market stores in southern California, notably in the Coachella Valley, where Tesco plans to open seven stores. Wal-Mart has denied that any such move is imminent, but it is unlikely to allow Tesco to set up shop in its own back yard without a fight.

At this stage, though, analysts are not worried as Wal-Mart's smaller outlets still are four times bigger than Tesco's Fresh and Easy stores. Mr Wade said: "Wal-Mart is a "one size fits all" retail format, whereas Tesco has a full range of expertise in managing different store sizes and customer profiles."

IC View

GoodValue

Even in the worst case scenario, Tesco's US expansion is more likely to dent its reputation than its earnings. But, its shares are highly rated, reflecting confidence in the group's business model. While waiting for the next US developments, the shares remain good value, at 454p.

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