Tesco Coming In 'Fresh and Easy'

Last updated Saturday, April 21, 2007 8:42 PM CDT in Business

By Anita French
The Morning News

The first ones are set to open in Phoenix, Los Angeles, Las Vegas and San Diego by the end of this year.

"Despite the planned stores relatively small size ... they will be places where you can do all your shopping. The stores will especially appeal to consumers with fast-paced lifestyles," Tim Mason, CEO of Tesco USA, told the San Diego Union Tribune.

Tesco said it had secured 20 sites in and around Phoenix and was researching additional locations, according to a recent CNN report. More than 2,500 jobs will be created once the openings begin, Tesco said.

The company has a 500,000-square-foot distribution center under construction in Riverside, Calif. at a cost of around $13 million.

George Whalin, president of a retail management consulting agency in California, called Tesco a "smart" company that could give Wal-Mart a run for its money.

"Tesco has had people here for two years, making preparations (for its U.S. entry). They're learning the business. Tesco is very competitive in prices and will be insourcing most of what they have. I think Tesco is going to blanket the country with these stores," Whalin said.

"Tesco is a highly respected European firm, and they're going to attract people. Low prices are no longer enough -- I think Wal-Mart has learned that. There's a lot of new companies with low prices. My definition of what (Tesco) is trying to do is create a better convenience store."

Even investment guru Warren Buffet, the owner of Berkshire Hathaway who also owns numerous shares of Wal-Mart, hedged his bets by buying 177.8 million shares of Tesco - a 2 percent stake -- after the company announced its U.S. plans last year.

Wal-Mart has been mum on any plans it might have to meet the Tesco competition. Spokesman Dave Tovar said the company remains focused on providing service to its customers.

"Basically, we have four formats: discount stores, Supercenters, Sam's Club and Neighborhood Markets. Our Neighborhood Markets are focused on providing a convenient shopping experience for our customers. What we're focused on right now is tailoring our Neighborhood Markets to specific communities, culture or lifestyle," he told The Morning News.

There has been media speculation that Wal-Mart hired David Wild, a former Tesco executive, as senior vice president of business development specifically to meet the Tesco challenge. Also, the company has opened two newly formatted Neighborhood Markets in Plano, Texas and Tulsa, Okla., that feature softer earth tones, a new layout and more healthy choices in food -- such as increased selections in organics and produce.

A Neighborhood Market is typically 39,000 square feet with a combination grocery store and drug store. Wal-Mart opened the first one in Bentonville in 1998 and opened its 100th store in Albuquerque, N.M. in 2006. The company plans to open 15 to 20 new Neighborhood Markets this year, it said in its annual report.

Griswold said he thinks Wal-Mart's revamping of its Neighborhood Markets is the company's first step in meeting competition from Tesco.

"One of the things that Tesco does extremely well is understand its customers. What Wal-Mart has done on customer segmentation is a big step for them. That will go a long way in getting them focused on understanding their customer. I think Wal-Mart will probably review their Neighborhood Market format because these are the stores that will feel the first impact of Tesco," he said.

Fortune reported in February that Tesco's U.S. invasion might even be more ambitious than the company has said. A search of public documents revealed that Tesco also has designs on the Colorado market as well.

In May 2006, the name Tesco Stores West, a Tesco subsidiary, was registered with the Colorado secretary of state, Fortune said. The name was also registered in California, Nevada and Arizona. A Tesco spokesman denied that the company had any immediate plans for the Rocky Mountain region, the article stated.

The Scotsman newspaper quoted Tesco CEO Terry Leahy as saying his company isn't setting out to take on one certain competitor or take business from competitors but only to "grow the market" in the United States.

Jeff Macke, retail analyst and president and founder of Macke Asset Management, provided a more cautionary note. He said he thought Tesco's success in the United States was going to be as "tough" as Wal-Mart's has been in the United Kingdom.

"It really hasn't worked for them in coming over (to other countries) and swapping cultures. You do have some successes, as Wal-Mart's efforts demonstrate. But it's not as easy as people think. You can understand the effort; Tesco ran out of places to grow. I've no ax to grind against either company, but I doubt Wal-Mart is staying up nights worrying (about Tesco)," he said.

Tesco raised its share of the $237 billion market in the United Kingdom to 31.2 percent from 30.6 percent a year earlier, the company reported this month. Wal-Mart's Asda slightly closed the gap on Tesco, adding 0.6 percentage points to its 16.9 market share percent.

Andy Bond, CEO of Asda, said in February his company is likely to follow the Tesco model and expand into the convenience store business.

In what some observers saw as an ironic note at the time, Lee Scott, president and CEO of Wal-Mart Stores Inc., asked the U.K. government in 2005 to look at Tesco's dominance after data showed its market share rising to 30.5 percent, way above Asda's then 16.7 percent share.

"As you get over 30 percent and higher I am sure there is a point where the government is compelled to intervene, particularly in the U.K., where you have the planning laws that make it difficult to compete," Scott said.

Asda wasn't the only U.K. retailer objecting to Tesco's dominance. Sainsbury's also demanded a clampdown on planning regulations to prevent Tesco buying land and opening stores close to existing outlets. And rival Morrison has accused Tesco of using its power to offer selective discounts of up to 40 percent, thus luring shoppers away from Morrison's and Wal-Mart's stores.

Retail Forward projected in 2005 that if Wal-Mart continued its current growth in domestic supermarket-type sales, it would give the company control of 35 percent of the food-store industry in the United States by this year.

Scott told Business Week in March that Wal-Mart believes it has a 10 percent market share in retail sales that are non-automotive and non-restaurant.

Griswold also said the "people side" in the competition between Tesco and Wal-Mart can't be overlooked. He guessed that Tesco is already looking at the top performers at Wal-Mart and its employees and said he spoke to a couple of retailers on the West Coast who had already lost people to Tesco.

"From what you hear and read, primarily from the United Kingdom, Tesco is very well thought of as an employer. I think Tesco will have a lot to offer in terms of a new and exciting company and salary perspective. People tend to associate Wal-Mart with a low starting wage, and I think Tesco may offer those people more," he said.

Tesco and Wal-Mart can commiserate over one thing: they both face union opposition. Wal-Mart has been the target of union-backed campaigns critical of the company's wages and benefits for several years now. One of the most outspoken has been the United Food and Commercial Workers, which is also opposing Tesco's planned stores on the West Coast because they may not be unionized.

* World's fifth largest retailer with 2006 sales of $85 billion

* United Kingdom's largest supermarket with more than 30 percent market share.

* Tesco is investing $400 million per year over the next five years on its U.S. entry.

* Tesco's record for entering new markets is 11-to-2 -- it only stumbled in France and Taiwan.

* Tesco.com is the world's biggest online grocery, earning $40 million in profits.

SOURCE: Tesco and Kevin Coupe of Coupe Communications

Notable:

"Tesco's entry into the U.S. will change the retailing paradigm by providing the look and feel of a full-service grocery store in a compressed footprint. It is time to think outside the box and create new and innovative ways to service the customer and perhaps even revisit initiatives that may have been before their time." Mike Griswold of AMR Research

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