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Tesco Challenges

Jim Prevor’s Perishable Pundit, August 15, 2006

The Pundit has been keeping his eye on Tesco since long before it announced earlier this year its intention to spend up to £250 million a year or just shy of $500 million a year to open new stores roughly modeled after the Tesco Express format they use in the U.K and several other countries.

They’ve been trying to keep things quiet, going as far as using a phony name, “Buttoncable West,” to cover their tracks and setting up a prototype store in a warehouse in Los Angeles that they told people was a movie set.

But they have been outed, and it has now been announced that they’ve purchased an 88 acre parcel in Riverside, CA, on a former air force base and will use the land to build a distribution center.

They have registered Tesco Fresh & Easy as a trademark in the U.S., so presumably will banner their stores with this name.

And, if you are interested in a job, you can see what career opportunities they are advertising right here.

Goldman Sachs estimates that the budget should allow for the opening of around 200 stores a year, and it is reported that Tesco has signed retail leases in California, Nevada and Arizona.

Obviously a venture into the world’s single largest consumer market is a top priority venture for Tesco, and they are staffing it with some of Tesco’s most trusted executives. These players include: Tim Mason, a member of the board of directors of the parent corporation and famous as the guy who created one of the most successful loyalty programs in the world; Tony Egg, Tesco’s top real estate officer, who is personally overseeing the US real estate operation; and Bryan Pugh, who was the COO for Lotus stores, Tesco’s chain in Thailand, is on the team as well, presumably preparing for an operating role.

It is believed that most of the leases are for stores in the 10,000 to 15,000 square foot range, which means they are significantly larger than the British concept.

It is uncertain exactly what the stores will be like. It is known that they will emphasize private label, and that has led to comparisons with Trader Joe’s. There are also substantial indications that the stores will be heavy with perishables and prepared foods. The Financial Times reports that Tesco will be looking for “top-up” shoppers who want easy, local access to high quality fresh foods.

Reports from the trade in the U.K. indicate that at least some of Tesco’s U.K. suppliers, especially in the prepared foods arena, have been asked to open in the U.S. along with Tesco. The model being discussed seems to emulate the system of Japanese car companies that came to the U.S., built Greenfield plants and had certain Japanese suppliers move with them. When you are putting your own label on food, especially fresh foods, you better be working with suppliers you trust. Here is a techy explanation of how this works.

I wish Tesco well. Certainly the industry could use a vibrant new format. And they could be a tremendous new outlet for fresh foods.

And they might be on to something in terms of size. A classic response when a Supercenter and/or a Warehouse club open in a neighborhood is for the supermarket to revamp, deemphasize the highly competitive packaged goods market, while emphasizing all the perishable departments and foodservice areas.

Of course, a lot of square footage is dedicated in a conventional supermarket to the dry grocery items, so if the stores are going to become “Fresh” stores, maybe they can be smaller stores. And if they can be smaller, maybe they can be put in more convenient locations.

But there are a lot of maybes in there.

Americans , even in the trade, don’t realize it, but Tesco is a giant retailer, bigger in food than Kroger, Safeway, Costco and Ahold. It is a giant non-food retailer as well. But bigness doesn’t guarantee success in every venture. Just ask an even bigger retailer, Wal-Mart, after its recent billion dollar write-off in Germany.

Obviously there are operational issues, labor issues, real estate issues — mess up on any of this and the project could fail.

But there are three overarching obstacles:

First, Tesco is making a massive bet on changing America’s shopping habits, and changing habits is very difficult.

Second, Tesco’s bet on private label is dangerous for a company whose name has no brand equity with Americans.

Third, the substantially lower population densities in the U.S. will make it difficult to sell at the volumes necessary to keep the fresh food, especially the fresh prepared food. It also will be difficult to keep it fresh, safe and appealing. Then the concept will face a dilemma: Keep stocking the fresh prepared foods in variety but experience unacceptable levels of shrink, or scale back the variety, which will make the stores unexceptional. It’s a Hobson’s choice, but could well be Tesco’s.

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