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Tesco And Others Were
Unable To See US Nuances

Jim Prevor’s Perishable Pundit, June 2, 2009

We have written much about Tesco’s Journey to America as Fresh & Easy, but our recent piece, Pundit’s Mailbag — Hope For Tesco Vendor Community ‘Is Gone,’ led a former Chairman of PMA and The Produce for Better Health Foundation and former Corporate Director of Produce at Supervalu to recollect a story from early in his career:

I always enjoy reading the “Pundit” and staying posted on the many topics boiling in our fascinating industry.

As I read your piece about Tesco’s inflexibility, I was dramatically reminded of one of my personal experiences twenty-some years ago. I was involved in the U.S. startup of MAKRO — a privately held Dutch firm that was immensely successful in multiple countries (and still is).

At that time they were considerably larger than P&G and very well capitalized. They were one of the first U.S. entrants with a “wholesale club” format, and I quickly saw the potential for a viable new channel of distribution.

However every suggestion for better adaptation to American consumers was strongly resisted because “that was not the way they did things in Europe”.

Unfortunately no one told the customers they had to behave like Europeans!

Sol Price was already operating in California, but otherwise they had an incredible market opportunity. Their complete lack of adaptability left them stagnant in America, the American adaptations (Sam’s, Pace, Costco, etc.) emerged immediately and performed better with most of the modifications we had previously suggested.

I moved on to more promising opportunities a couple of years before they sold their U.S. stores to a competitor. I still see their stores when I travel internationally and think what an opportunity squandered. Sound familiar?

— Ted Campbell
Executive Director
Florida Strawberry Association
Dover, Florida

After a bout in the floral category as Vice President of Sales and Marketing for Kerry’s Bromeliad, Ted is now back in produce, helping the Florida strawberry growers manage their affairs. We are honored he finds time to drop us an occasional line here at the Pundit. We especially found value in a letter he wrote us that we incorporated in a piece titled Pundit’s Mailbag — Little Tolerance For Dictatorial Buyers. Indeed as we read that piece over again, we find sections very relevant to the discussion we’ve been having about how to deal with retailers who are very demanding and won’t pay a price that allows for a profit.

In a different context here is what Ted Campbell wrote related to that subject:

While at SUPERVALU, I was a strong advocate of dropping even the largest of accounts when it was clear that their business could never be profitable. A wholesaler must provide tremendous infrastructure to supply a large customer — warehouse space, trucks, special products, human resources, etc. — and must earn a reasonable return on that investment.

Sometimes in business, you learn that the best thing to do is pass on unprofitable business. Let your largest competitor get it and they just may wind up sinking with it.

If you are a public company and give up a big account, in the short term stock market analysts who don’t really understand your business may crucify your company for losing so much business. There is often little understanding that economies of scale only work up to a point of diminishing returns. It is one thing to take on some lower margin business to increase utilization of existing facilities, but building facilities and planting acreage to accommodate low margin business can be a path to disaster.

In most cases, even to keep a big client’s business when it was functioning at a break-even was unfair to other customers that compete with that big client. Why would you help an unprofitable or break-even client drive your profitable clients out of business or even just reduce their volume?

Today, he writes us about Tesco and, more broadly, how easy it is to miss opportunities if one is not truly open to new opportunities.

For all its size, Tesco is a remarkably insular organization. Of course, if a western company is going to civilize some foreign land and bring western standards where they have never been before, it will be compelled to bring many executives and suppliers to the developing country.

The real question is why did Tesco send any British executives to the US? Why did it feel the need to have British suppliers set up camp in the US?

What is it that a Wild Rocket knows how to do that a Ready Pac, Fresh Express, Dole, Taylor Farms, Mann Packing, Apio, etc., do not know how to do?

We suspect nothing. The issue was not capabilities, it was comfort, and Tesco was comfortable with own executives and its own vendors, so it brought them to the US.

The cost, though, was not just the expense of paying the British staff or arranging for all new facilities for the British vendors. The cost was being cut off from intelligence about American consumers. Yet Tesco seemed so insecure it never caught on to this. In fact, long after troubles were clear, Tesco brought in an American to help the chain but selected an American that had been working for Tesco in Thailand for several years!

In other words, right now they should make Bruce Peterson an offer he can’t refuse and make him CEO. If they give him a free hand, he would instantly turn the vendor relationships from adversarial to friendly and would analyze whether it makes sense to maintain organizations such as Wild Rocket when Ready Pac is down the block.

In the early days, when we noted things such as that 25% of the SKUs for bagged salads were in watercress — although Ready Pac, Dole and Fresh Express, all experts in American consumer habits related to fresh bagged salads, carried a grand total of zero SKUs in this item — we knew right away that either Tesco was cut off from intelligence about American consumers or it had decided to “teach” Americans what they “should” be eating.

Alas, though the Queen may serve watercress sandwiches, we doubt MickeyD’s will be adding it to lineup anytime soon.

Of course, Tesco has been successful in many foreign markets. We have theorized its problems in America are due to the fact that we both speak English. It is just obvious that people who speak foreign languages will have foreign preferences, so the home office may defer. But in the US, it is too tempting for the British to think that we are the same and they miss so much nuance.

Indeed, companies, including Carrefour and Makro, seem to have disproportionate problems in the US. Maybe this is because the US market is particularly complex. We are, after all, not a country but a continent, filled with people of every nation in the world.

We wonder if the propensity of so many executives to learn English and study in American universities doesn’t backfire. We know little about Makro’s experience here but lots of Dutch speak English and surely some of its executives had picked up an MBA at an American university. Perhaps this led to a belief that they understood Americans and knew what they would come to accept.

Of course, sometimes these things are cultural. We are told that when tilt/telescope steering wheels were developed the engineers at Cadillac eagerly embraced the idea — seeing it as the ultimate “luxury” to be able to have the freedom to adjust things as one would prefer.

It is said, though, that the Mercedes-Benz engineers recoiled at the thought. They had carefully determined the correct angle for everything and didn’t cotton to the idea of letting every customer mess it up.

If you think you know the “right way” and are not culturally predisposed to allow for choice and variation, it is easy to get stuck with a concept of limited appeal.

Many thanks to Ted Campbell and the Florida Strawberry Growers for bringing some experience to this topic of industry discussion.

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