You are here:

Tesco's American dream

Created:
27 June 2007
Written by:
Nathalie Olof-Ors

Tesco's international expansion has been a source of comfort for its shareholders of late. While the UK business has been hit by slowing growth in non-food sales, international sales have been growing rapidly. The group's recent trading update revealed that international sales had risen by 24.6 per cent at constant exchange rates in the first quarter, far outpacing UK sales growth. Chief executive Terry Leahy highlighted, in particular, the strong performance in Asia - especially China - and said that the conversion of the acquired Leader Price stores in Poland and the Makro stores in Malaysia is going well.

Advertising

Now, the Hertfordshire-based company is going a step further, entering the birthplace of supermarket retail: America. Tesco is setting out to conquer the West Coast of the US with a network of small stores in densely populated areas with a format "designed to draw customers back to their local neighbourhoods". The offer will be based around freshly prepared food, such as salads, pasta dishes and poultry. The initial objective is to open over a hundred stores during the first year, starting with Los Angeles, Phoenix, Las Vegas and San Diego.

The concept is reminiscent of Tesco Metro, which has greatly contributed to the group's success in the UK over the past few years. But during its transatlantic passage, the Tesco Metro format has had a serious makeover. Tesco's US operations will be based on "environmentally-friendly practices". Notably, carbon labels will be assigned to products, some stores will provide bicycle racks and a solar-power roofing system - larger than the one currently being installed at Google's headquarters - has been ordered for its distribution centre. Tesco will ditch its blue-and-red stripes for a green logo and the stores will trade under the brand name "Fresh & Easy". But whether these efforts will be enough to win over the US consumer remains to be seen. First, Tesco has to deal with the burrowing owl - the group has been hit by lawsuits against its distribution centre claiming that the facilities pose a threat to the burrowing owl, a protected species.

More worrying, though, is the fact that Tesco is trying to enter an increasingly crowded organic retail segment. The organic food format has been the success story of the decade, with the rise of chains such as Whole Foods, Wild Oats and Trader Joe's. The first two provide an upmarket shopping environment that the UK consumer recently discovered following the lavish opening of a Whole Foods store in Kensington. This concept is appealing both to consumers and shareholders as it generates high margins. By contrast, Trader Joe's offers a less pricey product range in a laid-back atmosphere that has proved highly popular in California.

But, over the past few months, competition in the US organic segment has stiffened. Organic stores have sprung up on every street corner, while conventional supermarkets have extended their organic range in an attempt to regain market share. Recently, Whole Foods revealed that its pace of growth was slowing and chief executive John Mackey has announced his intention to merge with its largest competitor, Wild Oats, in order to protect market share and prevent a price war. This tougher market raises serious questions over Tesco's US strategy, such as whether the group has missed the boat. After all, when even well-established retailers with a solid client base are under pressure, a newcomer may find it hard to get a foothold.

Tesco's decision to bring along two of its leading UK suppliers - Nature's Way Food and 2 Sisters Food group - rather than establish partnerships with local food processors could also be a mixed blessing. The choice does give Tesco firm control over the quality and reliability of its supply chain, hence protecting it from unpleasant surprises that could compromise its US operations. It will also bring a European edge to its product range that could appeal to Californians. Indeed, some local supermarket chains, such as the privately-owned upmarket Andronico's, have built their success on their European imports. But the key to overseas expansion is to adapt the product to local tastes - so Tesco's ability to meet American customers' expectations will be under scrutiny.

A CAUTIONARY TALE

Many European retailers have come a cropper trying to expand into unfamiliar territory. For more, click here

  • Back to top

Win £1,000 or a golf weekend

Enter IC's Fantasy Portfolio competition for the chance of winning £1,000 or a luxury golf weekend, courtesy of ETX Capital and Celtic Manor.

Enter here for your chance to win

Advertorial Feature

Take control of your investing with CFDs

Have you ever watched a move in the markets that you saw coming, but you weren't able to exploit?

by Dominic Picarda

Advertorial Feature

Spread your risks with spread trading

With so many big moves in the world's financial markets, there have seldom been more opportunities around for spread traders. Isn't it time you joined them?

by Dominic Picarda