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Tesco’s US/Japan Small-Store Strategy
Contrasts With Wal-Mart’s Big-Store Plan

Jim Prevor’s Perishable Pundit, April 24, 2007

With Tesco’s announcement that it would open a chain of small food stores in Japan and its previously announced plans to open a series of small supermarkets in the U.S., while Wal-Mart remains focused on its supercenter format, the battle between Wal-Mart and Tesco seems to resemble that between Boeing and Airbus.

Airbus has been in the news as it prepares for the much delayed launch of its Airbus A380, a superjumbo plane larger than a 747. Depending on configuration, the plane can carry as many as 840 passengers in an all-coach configuration as opposed to 568 in an all coach configuration of the Boeing 747.

Boeing, in contrast, is focusing on its Boeing 787, aka the Boeing Dreamliner. This is the first airliner to be made mostly of light-weight carbon fiber instead of aluminum. Crucially its range will be over 8,000 nautical miles, roughly enough to travel non-stop a third of the way around the world, making possible city pairs that had not been possible before. It is much smaller than the A380.

Obviously each plane has its distinct characteristics, and the ultimate success of any business is heavily influenced by effective implementation. But, at its core, the two planes are expressions of the two companies’ differing visions of the future of aviation.

Airbus looks at the world and notes that it is almost impossible to build a new airport today what with environmental activists and political outcry over noise and development. Even building additional runways can take decades. With the population growing, affluence in nations such as China and India opening air travel to many people, and increased international trade, the demand will surely be there for more air travel.

With restricted supply of take-off and landing slots, plus increased demand, Airbus would say that the only way to meet that demand will be for larger aircraft that can use the limited take-off and landing capacity more fully.

Boeing looks at the world and says that the old hub-and-spoke system is going to be deemphasized. It notes that in the U.S., deregulation led airlines such as Southwest to serve more destinations on a point-to-point basis, without funneling people through hubs.

So instead of two massive hubs, say Los Angeles and Tokyo, between which North American and Asian traffic will be funneled, Boeing sees direct flights of smaller capacity but more fuel efficient and longer range aircraft. So instead of a trip from say Salt Lake City to Bangkok involving a trip from Salt Lake City to Los Angeles then from Los Angeles to Tokyo, then Tokyo to Bangkok — Boeing’s vision is a direct flight from Salt Lake to Tokyo, maybe even a direct flight from Salt Lake to Bangkok.

This means that large capacity planes aren’t desirable because there isn’t the traffic to support large planes on these point-to-point routes.

So far the market says Boeing is winning the battle. The company has already sold enough 787s to be profitable if it can produce the plane it promises. Airbus has had more cancellations than orders lately for the A380. Although technically a marvel, and the plane may yet come into common use, the high cost of delays means that it will be difficult for Airbus to ever earn a reasonable return on its investment.

One wonders if Tesco’s decision in both the U.S. and Japan to launch a small scale concept isn’t influenced by the British real estate situation in which launching large Greenfield stores, such as the typical American Wal-Mart Supercenter, is increasingly difficult.

Perhaps Wal-Mart’s lack of urgency in responding to the Tesco invasion in the Southwest is influenced by its experience in which it is still possible, even if difficult, to build large stores. And Wal-Mart has found it so much more profitable to build the large stores that it neglects smaller opportunities.

Everyone always says that their overseas activities are driven by local management but, in the end, it is the home team that has to approve capital allocations in the hundreds of millions of dollars. It would be surprising if these top executives could always transcend their own experiences.

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