Tesco U.S. touts convenience, sustainability

LAS VEGAS —Tesco is making its angle of attack on the United States market ever clearer, launching a Web site as its first major marketing initiative to U.S. consumers. Yet in many ways, it is keeping its cards close to the vest, which suggests to observers and analysts who have watched its international expansion that it is preparing to play some big hands, including the possible addition of more store formats.

Tesco continues to reveal its plans for the U.S. market card by card. Speaking in Las Vegas last week, Tim Mason, ceo of Tesco’s Fresh & Easy Neighborhood Market, the retailer’s America banner, said the company had secured 14 sites in Sin City and should have about 100 units in total (across four major markets) by February 2008.

The British retailer clearly intends to make sustainability a point of differentiation, which may turn out to be good timing given recent United Nations reports, Washington debates, weather events, energy concerns and Earth Day celebrations, all of which have made environmental issues more prominent for consumers in the United States.

Environmentally friendly initiatives—touted on Freshandeasy.com—have been part of Tesco’s activities from the start. The British food retailer previously announced that the distribution center it is building in El Segundo, Calif., would be topped with the largest solar panel roof installation in the Golden State, and that it will be using LED lights in its refrigerated cases as one of several energy-reducing efforts at its U.S. stores.

The company also is building on store-level initiatives it developed in the United Kingdom and elsewhere.

Internationally, the company has been developing stores that reduced the carbon emissions deriving from their operation. Initially, the reconfigured test stores reduced carbon emissions by 29% by Tesco estimates but more recent test stores have cut carbon by 50% and a unit that reaches 60% is planned. At least some of Tesco’s California units will fall into the test store definition, ceo Terry Leahy said in a statement.

Still, Tesco has its work cut out for it in developing the U.S. market. Getting the multi-state undertaking off the ground will challenge its merchandising, marketing, logistics and human resources skills. On the human resources side, Tesco is using Freshandeasy.com to advertise for workers in Phoenix, Las Vegas and six Southern California counties: Los Angeles, Orange, San Diego, Ventura, Riverside and San Bernardino. Tesco’s environmental/sustainability initiatives fall under a larger umbrella that includes promotion of Tesco as a good neighbor, so, for example, no truck deliveries are to be scheduled while school buses are dropping off children, and as a good employer, with statistics about how its workers would recommend Tesco for the quality of its jobs.

Although retail observers have been getting quite excited about Tesco’s entry into the United States, with questions about the company’s impact becoming a staple of supermarket conference calls, the debut of Fresh & Easy is still some time away.

“It’s most likely going to be fall, but it’s too early to tell,” said Tesco spokesman Brendan Wonnacott. “It all depends upon the permitting process and such. That’s the official line. It’s hard to pinpoint.”

Not everyone in California is welcoming Tesco. Temeculah, Calif., environmental attorney Raymond Johnson has twice sued Tesco about the impact of its distribution center, sustainability been damned. Both suits were thrown out of court, although the second, squashed in early April, sparked rumors that Johnson was putting Tesco off its construction schedule. Rumor has him tied to the United Food and Commercial Workers union as well. According to analysts, the UFCW has challenged some store liquor licenses as well. The thinking is that the union wants Tesco to adopt a position of neutrality on labor organization. While rattling the company’s cage occasionally, unions seem to be taking a conciliatory line, characterizing the company’s labor record as largely positive. “Clearly, they’re trying honey here,” said JP Morgan analyst Marc Levinson.

Wonnacott denied that the distribution center has fallen behind schedule, saying the suits had not pushed its opening back at all.

That distribution center may be doing multiple duty soon. Professor Mohan Sodhi of London’s Cass Business School said that while Tesco has had success with its Express units, the basis for Fresh & Easy, he noted that its strength isn’t in any given format. Tesco’s ability to run multiple formats successfully in densely populated markets in the United Kingdom and elsewhere suggests to Sodhi that the company will begin opening larger formats including full-scale supermarkets sooner rather than later. By offering a variety of units based on various population needs in a given geographic area, Tesco can tailor its offering and maximize distribution efficiencies to serve consumers.

“Tesco is very good doing different formats and that suits markets like Southern California,” Sodhi said. “And it can do supply chain well to handle a variety of formats. That can be a competitive advantage. They can really go out there and muscle out American grocery stores.”

In a conference call, JP Morgan European retailing analyst Jaime Vazquez acknowledged, “A long list of European retailers has failed in the U.S.” He added, however, that Tesco could be the exception for several reasons:

Tesco has expanded in intensely contested food retail markets in Europe, and those skills will help it compete in the United States.

Tesco has signaled its commitment to the U.S. market by deploying Tim Mason, a parent-company board member and an executive who may be the next ceo, to oversee development.

Tesco is a global master of driving sales per square foot, which is a key to U.S. success.

Fresh & Easy’s convenience orientation will immediately differentiate it in the market.

Tesco will build on its established and strong private label program, which will be another positive differentiator.

Tesco is experienced in adapting its formats to local tastes.

Tesco is adept at loyalty card operations including the use of the data they generate.

Tesco is also a quick learner, demonstrating the fact as it went from zero hypermarkets or international market presence to 565 hypermarkets and operations in over a dozen countries in about 12 years.

The hypermarket is usually the format Tesco leads with as it enters another country. Hypermarkets are useful for quickly building sales, and that’s important as Tesco generally bleeds money when it enters a new market—it will initially lose about $130 million in the United States—until it reaches something over $1 billion in sales. A critical reason for the rapid pace of U.S. Fresh & Easy locations is Tesco’s need to exceed sales thresholds, Vazquez said.

JP Morgan analysts said Tesco could have 250 U.S. units generating $4 billion in sales by the end of 2008, at which point the operation will be producing a profit of about $240 million.

Still, investors may grow skittish about Tesco’s U.S. entrance if things don’t go according to plan, and they rarely do when a retailer enters a new country. Tesco has a great track record. It has succeeded in every country it has entered so far. But the maturity of the United States and the strength of retailers that have been entering the better-for-you and convenience consumables space, not to mention conventional and alternative food retail chains, will make Tesco’s job tough.

“The market here [in London] is paying excessive attention to Tesco’s entrance into the U.S.,” Vazquez said.