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Teething problems at Tesco?

Created:

14 May 2008

Written by:

Nathalie Olof-Ors

Saying that Tesco has one of the most innovative marketing strategies in retail would be an understatement. Over the past 10 years, the UK's largest supermarket has built up one of the most comprehensive databases tracking British households' habits to help the group give customers exactly what they want.

And last week, the group made another demonstration of its marketing prowess as it launched a website dedicated to Polish delicacies in response to the fast-growing demand from the estimated 1.2m Poles living in the UK. Tesco, which stocks around 250 Polish products, including salty sticks and white sour soup, says that Polish food has become its fastest-growing ethnic cuisine ahead of Chinese and Indian food.

"Interestingly, this is precisely the sort of move that Tesco has been criticised for not doing enough in the new US business," noted broker Citigroup, which interpreted the initiative as a sign of Tesco's flexibility and expects the group to come up with more US-specific ideas in the coming weeks.

Recently, the group has faced scepticism about its American expansion, despite chief executive Terry Leahy's repeated efforts to convince the market that its Fresh & Easy stores are generating higher sales densities than local competitors. Still, the mixed debut comes as a surprise. When Tesco unveiled its US plans last year it was keen to stress that some of its executives went to live for a year with selected American families to get a detailed analysis of their day-to-day habits. That's because the group wanted to avoid falling into the same traps as its European competitors, which had all failed to break even in America.

Yet the customer response to its well-planned format has so far tended towards more sceptical analysts' predictions. Arguably, any difficulties may only be teething problems, which bullish analysts believe will ease as brand awareness grows in Southern California.

Nonetheless, Tesco still has a lot to do to prove the bears wrong. Indeed, a failure in the US would be a symbolic defeat that could create serious doubts about the marketing machine that has powered the group for so long. This could quickly amplify the growing concerns over its UK business, where the group has recently lost market share to Morrisons. Tesco certainly has the firepower to retaliate should it choose to do so, but it is interesting to note that Morrisons recent improved performance has been led by a marketing campaign that has captured the zeitgeist in the UK, as marketing gurus like to say.