Tesco hits brakes on U.S. expansion

RIVERSIDE, CALIF. —Tesco’s decision to take a three-month break on new store openings has some industry observers questioning how well its Fresh & Easy stores are doing. But the chain says the down time was preplanned and that its expansion plans are still on track.

Saying it needs to give its rapidly growing business time to “settle down,” Tesco said its two store openings in Arizona on April 2 and April 8 would be its last until July. In the meantime, it plans to make changes to address unspecified issues in stores. “We’ve given ourselves a little time to kick the tires, smooth out any wrinkles and make some improvements that customers have asked for,” said Tesco U.S. marketing director Simon Uwins. “Quite simply, it’s to allow the business we’ve created time to settle down.”

He said Tesco opened 31 stores during a 66-day period earlier this year in what he described as “an opening program on steroids,” an assessment one analyst agreed with. “It’s opened a phenomenal number of stores in a very short time,” said George Whalin, president of Retail Management Consultants in San Marcos, Calif., “and it makes perfect sense for them to take a break and see where they stand.”

Tesco has opened 61 stores since its November 2007 debut in California, Arizona and Nevada. It plans to have 200 stores open by February 2009, and to expand into the Bay Area next year. Tesco spokesman Brendan Wonnacott says its three-month hold on expansion was “not a scaleback or a halt.” “Before we even opened our first store, we left a period of time open where we would stop expanding and assess the business,” he said.

But the three-month break has raised questions about the health of Fresh & Easy, especially in light of a March 13 report from Mike Dennis, a U.K.-based analyst with Piper Jaffray, who alleged stores were 70% under original sales projections. In March, Dennis told London’s Evening Standard newspaper that the “Fresh & Easy concept is not right and they need to quickly find out what the issues are and reset the concept.”

Tesco hasn’t commented on Dennis’s allegations and said its sales are on track with original projections, though the company hasn’t released sales figures and won’t do so until late 2008.

The United Food and Commercial Workers Union in California has also stepped up efforts against Tesco by distributing fliers outside stores questioning the freshness of Tesco’s meat and produce. “The fliers have stories about alleged incidents at Tesco stores in the United Kingdom and don’t even mention Fresh & Easy,” said Wonnacott, noting that the fliers have been distributed at stores in Las Vegas and Phoenix as well as California.

To date, Tesco has made few notable changes to its business model outside of accepting American Express, a move it made in mid-March in response to customer requests. But it’s expected to address issues raised by critics, including alleged problems keeping its shelves stocked, particularly in the produce section.

While some critics have been quick to paint Tesco as a retailer with problems, others say it’s too soon to judge it after just four months in business in the United States. “One thing they do very well is listen to consumers and make changes accordingly,” said Whalin. “And they have a good track record [entering new countries], so they’ve been down this road before.”