Tesco's U.S. Invasion

By Clive Beddall

A formidable new convenience competitor is arriving in America this month, and everyone is — or should be — watching closely.

He is modest and unassuming. But to millions of British shoppers, not to mention grocery gurus around the globe, he is the supermarket boss with the Midas touch. And he is setting up shop in America.
Sir Terry Leahy, the most powerful figure in retailing in Great Britain, is finally coming to the United States to conquer what he calls the underinvested part of the American food retail market — the specialist convenience sector. The ultra-ambitious 51-year-old chief executive officer of the $84.9-billion Tesco Group, the world’s third-largest supermarket firm by sales after Wal-Mart and Carrefour of France, will this month open for business in California, as the United States becomes the latest platform for his bid to dominate world food retailing.
The chain plans to open about 100 stores in California, Arizona and Nevada in coming months, with the first six slated to open their doors this month in Southern California.
 The Tesco story is impressive by any standards. The chain has always followed the trading maxim of “piling it high and selling it cheap,” and nowadays takes one in every eight sterling pounds spent by Britons on groceries. Thus it commands a UK market share of more than 30 percent — twice the size of its nearest competitor, the Wal-Mart-owned Asda superstore chain.
 Leahy arrives in the United States with an excellent European business pedigree that has most recently seen him elevated to the elite group of industry bigwigs who sit as advisors to new British Prime Minister Gordon Brown.
And as the man behind the Tesco colossus, he is respected for his encyclopedic knowledge of the retail business, not just in Britain, but also across the world. That’s a trait that already has helped him spread his wings around mainland Europe as well as the Far East.
A look back
But then Tesco’s knack of coming up with the unexpected and introducing new in-store ideas long before their rivals, has been evident ever since the chain was founded nearly 80 years ago amid the street markets of London’s working class East End.
Its originator, the late Sir John (“Jack”) Cohen, is a business legend in world supermarketing circles. He pioneered the self-service grocery system in Britain after founding Tesco Stores as a limited company in 1932. By the 1950s, as post-war food rationing came to an end, Tesco had about 150 stores and was beginning to challenge the main street dominance of already established British chains.
But as the supermarket revolution moved into Britain from the United States, so Cohen was quick to adapt his units, and his first supermarket opened in 1956. Today the group has 1,988 UK stores, with nearly 80 percent of its sales and profits coming from the British business.
 It has four different trading formats in the United Kingdom. The Express format has sales areas of up to 3,000 square feet and as many as 7,000 lines in product categories including produce, liquor and an in-store bakery. Metro is a convenience operation in town and city-center locations, with from 7,000 square feet to 15,000 square feet of selling space. Superstores boast between 20,000 square feet and 50,000 square feet of sales space, often with non-food operations including DVDs and books, and extra.
But as Leahy prepares to woo American shoppers, he is well aware that, with a couple of notable exceptions, British food retailers have traditionally steered clear of moving into the over-crowded U.S. market.
Position change
In an exclusive interview six years ago, Leahy pointedly talked down the notion that Tesco would ever cross the pond. His philosophy at that time was to go for growth much nearer home, in mainland Europe.
However, six years is a very long time in the international grocery business. Tesco’s arrival in California comes after months of secret planning as its executives have quietly criss-crossed the Atlantic to study consumer shopping trends in the United States. Leahy secretly set up a test store in a warehouse in a suburb of Los Angeles by using the story that the unit was part of a set for a new film. And a hand-picked team of 20 senior Tesco executives flew to California to do forensic-style market research, even sleeping over with American families to see how they lived and shopped.
Yet while all this was going on, some Tesco spokespersons continued to deny an interest in the American market. But, inevitably, as the Tesco team was spotted in California, it became clear that Leahy was sizing up the opportunities to inject his own new brand of convenience retailing into the American market under the Fresh & Easy banner.
The model is expected to be based partly on its smaller store format, Tesco Express. This has already been a major success in other parts of the world since it opened its first trial store in London in 1994. The trading philosophy is simple: offer customers great value, quality and fresh food close to where they live and work.
 But Tesco insiders are whispering that Leahy has a few surprises up his sleeve when he finally opens for business. For a start, supplier sources say that the firm has been closely studying sales trends in the fresh foods sector in California. Indeed, some say that the new concept will be “partly Tesco and partly in the style of Whole Foods,” the Austin, Texas-based natural foods retailer that has recently opened its first major store in the United Kingdom, drawing massive praise from British grocery experts. Tesco sources, however, privately throw derision at this description, retorting with the statement that, “This will be an entirely new Tesco, specially developed for the American market.”
 Leahy admits that one of the tricks Tesco has used is to “tailor stores to local shoppers and take what we learn back into the group to improve how we operate.”
A ‘fresh’ new concept
Thus, the California concept, the company insisted in one of its few public statements prior to the opening, will be unlike anything ever seen in the U.S. convenience arena. And some believe that the concept may one day wind up being introduced back on British shores.
It is clear that Leahy has done his homework. Significantly, he told The Wall Street Journal recently that North America was a place that rewards innovative retailers, adding, “If you do something different, you get rewarded for it. And retailing returns in America are quite good by international standards.”
However, sources close to Leahy and the executive to whom he has entrusted the new U.S. venture, Tim Mason, also suggest that there is private admiration within the British group for the new style of neighbourhood store that Wal-Mart has been perfecting in the United States during recent years.
However, as one Tesco executive put it to me recently, “Terry is not a man who is prone to copying anything.” At this stage, perhaps inevitably, the British group is saying nothing about the pricing policy of the Fresh & Easy concept. But insiders say it will follow “good value” principles, without resorting to the rock bottom philosophies of Wal-Mart, for example.
Significantly, there are strong suggestions that half the goods on sale will be Fresh & Easy private label products — without trans-fats, artificial colors or flavors — and Tesco will make extensive use of green technology.
It is expected that the units will, initially, be around 10,000 square feet, will stock about 3,000 products and, to use Mason’s words, “be American stores designed for American consumers.”
Prototype preview
 But it’s the way Leahy will merge the “American way” with the experience gained in his home market that was intriguing grocery analysts in advance of the California opening.
In particular, suggestions that the Fresh & Easy stores will sell a range of preservative-free “ready meals” are arousing keen speculation among experts on both sides of the Atlantic. United Kingdom supermarkets, unlike their U.S. counterparts, operate on a small, crowded group of islands with restrictive planning laws. Although their U.S. cousins efficiently move goods hundreds of miles and keep them cheap, British chains have became adept at making regular, frequent deliveries to city-center stores. In other words, their supply chains have to remain sophisticated and able, for example, to switch from selling sandwiches at lunch breaks to selling “ready-meal” suppers in late afternoon.
British retailers have sought economies of scale from centralized food preparation. This has seen the introduction of more and more meal sections in-store, and Tesco, in particular, has developed product ranges that suit every taste.
The group’s talent for staying one jump ahead of its rivals is never better illustrated than in innovations with its supply chain. For example, Tesco has trucks with internal partitions for frozen, chilled and ordinary ambient goods. This enables the company to replace three deliveries with one, allowing it to sell groceries profitably in smaller stores at supermarket prices.
Club Tesco
But Tesco’s greatest single innovation might be its Clubcard loyalty program. While many world retailers merely use customer clubs to provide a discount to shoppers as they pay for goods, the Tesco scheme tracks every purchase, and thus builds one of the world’s largest databases. This finds correlations between purchases, allowing Tesco to fine tune the product range in-store to suit particular local needs.
Clubcard is the UK’s most popular loyalty card plan with more than 11 million active cardholders, and there are more than 80,000 different combinations of offers with each Clubcard mailing.
Meanwhile, although Tesco has delivered a robust performance in recent years, and there is much to suggest it is a business primed for further growth, like other UK supermarkets, it faces challenges in the months ahead.
 Britain’s Competition Commission has, for the past two years, taken a detailed look at the whole UK grocery market. This probe has included supermarkets’ pricing policies, their relationships with suppliers and their strategies for opening new stores.
Campaign groups have argued that the dominance of British supermarkets and Tesco, in particular, allow them to drive smaller businesses out of some towns. The supermarkets have countered by saying that they are simply pushing down prices to reflect consumers’ demand for cheaper food.
The Commission has gathered evidence from a wide area and is set to report its findings in February 2008.
Coincidentally, in June 2005, the Tescopoly Alliance was formed. This is a group that represents a diverse list of bodies from large international non-governmental organizations to unions and small pressure groups, embracing a range of issues from home workers’ rights to the decline in small, independent retailers.
Its main aim is to challenge what it calls the negative impact of Tesco’s behavior along its supply chains, both in the UK and internationally, on small businesses, communities and the environment.
However, despite allegations that some chains have proved to be heavy-handed negotiators with suppliers (particularly the smaller ones), grocery analysts believe it unlikely that the Commission will penalize the store groups.
A Tesco spokesperson puts it like this: “We are the UK’s No. 1 retailer because we listen and respond to customers and their changing lifestyles. Rather than developing products and services that we think customers want, we spend lots of time and effort asking them. It’s simple. We listen and respond, providing customers with what they tell us they want.”
And Tesco executives are quick to tell you that that will continue to be their policy as they set foot in the United States for the first time.
Clive Beddall is a former editor of the UK’s largest food business weekly, The Grocer. He was with the magazine for 40 years, 10 of them as editor-in-chief. He has covered food issues on every continent, and in 2003 was awarded the Order of the British Empire medal (OBE) by Queen Elizabeth for services to food journalism.

Tesco a Major Player in Confections
Tesco is easily the biggest retail player in the £4.1 billion UK confectionery market, and its expertise in the sector is leading to many predictions that it will seek to replicate this dominance after it opens in the United States this month.
According to the TNS Worldpanel, in the 52 weeks up to June 17, 2007, Tesco held 32.4 percent of the UK market, compared to its nearest rival, the Wal-Mart-owned Asda chain, with 17 percent.
However, despite this sales dominance, UK experts say that the overall sector is in decline as fewer British shoppers are buying confectionery and existing ones are shopping less frequently.
Key factors are the growing obesity debate in Britain and a television watchdog’s ban on so-called junk food advertising during television shows aimed at children under the age of 16.
Nevertheless, confectionery is still one of the biggest grocery categories in the UK, and major suppliers cite Tesco as one of the major drivers of product innovation over the years.
The growing healthy eating debate in Britain has led to many supplier-retailer partnerships that are designed to devise ways of helping shoppers understand how confectionery can fit into a balanced diet.
Three manufacturers, for example, Cadbury Trebor Bassett, Masterfoods and Nestlé Rowntree have invested heavily in creating front-of-pack logos to point consumers in the direction of a panel showing guideline daily amounts (GDAs) for calories, sugar, fat and salt.
Tesco has been the pioneer of GDAs across the UK retail market, and a feature of the trade in recent months has seen the allocation of part of the confectionery fixture to healthier products as well as implementing a clear signage policy.
Meanwhile, more U.S. manufacturers have been introducing their brands into the UK market. A significant feature has been the arrival of Jelly Belly, which has displayed strong credentials in a climate of celebrity culture. In addition, American candy brand Mike and Ike also launched in Britain last year and has rapidly developed a marketing initiative for “all fat-free candies bursting with fruit flavours.”
At this stage, Tesco is saying nothing about its likely involvement with confectionery in the new Fresh & Easy stores in California. But a leading supplier told me that the supermarket’s pioneering work in healthier products, given the special challenges in the UK, would stand it in good stead in the United States.