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Is Tesco Sending A Message To U.S. Competitors?

Jim Prevor’s Perishable Pundit, May 16, 2007

It is hard to know if it is bluster — like Muhammad Ali unnerving his opponents with his bragging and strong claims — or if it is a strategic mistake that will telegraph to competitors what needs to be done — as George W. Bush would say about efforts to delineate precisely what has to happen to take US forces out of Iraq — but Andrew Higginson, Tesco’s Finance and Strategy Director, gave a rather odd interview with The Business, a U.K.-based business publication.

Tesco is renowned for its secrecy. When the Pundit wants to know the name of Tesco’s new carrot supplier in America, he has to practically put on his trench coat and meet his Tesco employed friend in a darkened alley — so fearful are these people about company policy.

So it is strange to see someone as high up as Mr. Higgenson chatting away. Still, he made several key points:

“This is a launch, not a trial. The way we see this is it is an investment — if we create a success it will be something we can roll out that will create billions of pounds in value. But if not, the business [Tesco] can sustain a loss of £1.5bn in terms of failure; our careers might not, but the business would.”

This is kind of shocking. It is hard to know if he is challenging Kroger, Safeway, Wal-Mart and others by signaling to them that Tesco is prepared to lose £1.5 billion or roughly $3 billion.

Remember that because of the large market share of the incumbent retailers, a decision to compete aggressively with Tesco and prevent them from getting a toe-hold in America is likely to cost these players many times what it will cost Tesco.

Presumably Tesco thinks it could sell its capital investment in warehouses and stores for something around what it paid for them. So the “loss” being referred to is probably an operating loss. Some would be a normal ramp up as stores mature after an opening but if, say, $2 billion of this loss might be what Kroger’s CEO used to refer to as “investments in lower gross margins” — attempts by U.S. retailers to remain competitive could easily cost the U.S. industry $20 billion.

Of course, with a “neighborhood” format, price reduction would be much less if U.S. supermarket chains could confine price reductions to stores serving the same neighborhoods.

Perhaps Mr. Higgenson spoke intentionally, but he was directing his message to the financial community, concerned about the £65 million start-up cost (roughly $130 million U.S.) designated to the U.S. venture. The City, London’s version of Wall Street, gets nervous about Tesco’s management possibly falling in love with an unproven business concept. By publicly capping the losses, Mr. Higgenson may be limiting the damage to Tesco’s share price.

Whatever the motivations, Tesco is giving its competitors a clear message: Make this too difficult or expensive and we will give up. That is a little like dangling a red flag before a bull.

Mr. Higgenson does show awareness of the vulnerable nature of the Fresh & Easy concept:

“The concept will catch the green wave — there is a lot of fresh high quality produce and meal solutions — there is not a big ready meal market in America so we will have to see whether they like that.”

It is a rather shocking statement. Who opens 200 stores “to see whether they like that”? They must feel that their concept can be easily duplicated. Otherwise why not open a few to test it out before rolling out such an effort and incurring such expense?

Sometimes the interview comes across as if the concept is a blur:

“In America we are positioning it in between America’s Whole Foods Market, which does fabulous food unbelievably expensively, and Wal-Mart, which is as you would expect. We want great quality and price.”

It is hard to know what this means. Isn’t this the standard positioning for Kroger, Safeway and most U.S. supermarkets — more prepared foods and fresh items than Wal-Mart but less than Whole Foods, priced better than Whole Foods but more expensive than Wal-Mart? Wanting great quality and price sounds more like a slogan than a business model.

“Tesco has retained its fake store, hidden within a warehouse, where it has been trying out different concepts on consumers. Higginson says he has been pleasantly surprised by the reaction of consumers and also noted that Tesco’s American shareholder base has almost doubled, leaping from 17% to 28%.”

This fake store has been talked about so much it might be worth remembering that consumer research becomes very difficult once consumers know they are being studied. Especially in a concept such as this that, as Mr. Higgenson explained, is going to attempt to “…catch the green wave…” One wonders if in the surrealistic environment of a test store, people aren’t free to express their noble “green” aspirations.

Of course the important questions — Will they consider a limited assortment neighborhood market convenient or an inconvenience as Kroger CEO Dave Dillon explained here? What will consumers pay to be green? And other such questions can only be answered in the context of a life actually being lived.

Considering that only a tiny fraction of the U.S. population had ever heard of Tesco before its launch in America led to news coverage — well, it is not surprising to see greater awareness result in increased shareholding.

Besides, it is Warren Buffet’s Berkshire Hathaway alone that accounts for over 10% of the U.S. holdings.

We also think Tesco is making one big mistake:

Fresh & Easy will not have any reference points to its parent’s heritage. Higginson explains: “Tesco means nothing in California. We are about local business for local people. There is no point in being some quirky British thing landing in California.”

Don’t they know that Americans are mostly anglophiles? And love a great entrepreneurial story: Jack Cohen, the son of a Polish tailor, spends the £30 he received from serving as a soldier for our American ally, Britain, in World War I and invests it in food to sell at a stall on the east end of London and from that grows a retailer that spans the globe.

Most Americans upon hearing that story would react as Yogi Berra did upon learning that a Jew had been elected Lord Mayor of Dublin, by saying: “Only in America.” Tesco should test that on its fake store wall.

You can read our coverage of Tesco’s voyage to America right here. And The Business piece right here.

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