EL SEGUNDO, Calif. -- Tesco Plc's U.S. expansion has attracted billionaire Warren Buffett, whose Omaha, Neb.-based Berkshire Hathaway Inc. snapped up at least 177.8 million Tesco shares, a 2% stake, after the retailer announced its plans last February, according to Bloomberg, citing Berkshire filings.
Tesco, which has filed trademarks for three variants of the name Fresh & Easy for its U.S. convenience store/grocery prototype, expects to tap consumer demand for high-quality fare. As has been widely reported, the U.K. retailer will spend as much as $490 [image-nocss] million in the United States this year and plans to open stores in Southern California, Phoenix and Las Vegas during 2007.
With Buffett's recent interest in Tesco as it makes its move here, West Coast retailers and consultants are feeling the heat of the added financial backing. It's going to be a problem if they start opening stores all around us, Dave Rann, vice president of Super A Foods, a family-owned grocery chain that has 12 outlets in the region, told the news service. We're sprucing up our stores.
George Whalin, president of Retail Management Consultants, San Marcos, Calif., added, It's going to face some real hurdles because it's a brand new market for them and one that is extremely competitive. Having Buffett buying your stock, though, is a great endorsement, and he tends to get it right.
America has been a graveyard for other British merchants, said the report. J Sainsbury Plc, the U.K.'s third-biggest food retailer, sold East Bridgewater, Mass.-based Shaw's Supermarkets Inc. for $2.48 billion when it abandoned the United States in 2004. Marks & Spencer Group Plc sold Brooks Brothers in 2001 for less than a third of the $750 million it paid for the clothier 13 years earlier.
Other retailers failed because they either expanded too quickly or didn't do enough research on the market before entering it, Ted Scott, stock manager at F&C Investment Management Plc, London, told Bloomberg, Tesco's done its homework.
Tesco rang up a record 39 billion pounds ($76.5 billion U.S.) in sales last year at its 1,897 U.K. outlets, including 1,171 One Stop and Tesco Express convenience stores. The company says it collects one of every eight pounds spent in Britain.
Lawmakers and community leaders have criticized Tesco's market domination, saying the retailer mirrors Wal-Mart Stores Inc. in its ability to crush smaller rivals. Tesco is living proof of a winner-takes-all dynamic in British retail, Andrew Simms, policy director for the New Economics Foundation, which researches environmental sustainability and social justice, told the news agency. Tesco's expansion has resulted in the mass extinction of local retailers.
Earlier this month, the U.K. competition regulator said it was concerned that Britain's supermarkets, led by Tesco, may control too much of the country's grocery retailing industry. The regulator said it will look more closely at land bankingthe purchase of property to deny access to rivalsand its effect on competition at a local level. Bryan Roberts, an analyst at Planet Retail, London, told Bloomberg: Tesco is seen as the Wal-Mart of the U.K. Being virtually unknown in the U.S. will be viewed as a clean slate for the company and somewhere where it can make its mark.
It also faces a more competitive environment where consumers aren't tied to neighborhood shops. California is all about automobiles and traffic, and it's not uncommon for people to drive 45 minutes to see a movie, Whalin said. In the U.K., cars are not necessarily as important, and it's more about neighborhoods and communities.
To ensure a steady supply of food for its stores, Tesco is building an 820,400 sq.-ft. distribution center in Riverside, Calif., Dan Fairbanks, planning manager of the March Joint Powers Authority, which represents the municipalities that own the land, told Bloomberg. The facility will include two warehouses and a 101,000-sq.-ft. office and food processing area on property that was once part of March Air Force Base, Fairbanks added.
The size of the project shows that Tesco plans to open more than the 250 stores the British press has reported, said Roberts. It's a typical distribution center size when you compare it to other retailers that serve about 1,000 stores, he said. Tesco won't be stopping after opening outlets in California. It'll be looking to roll out the concept nationwide.
Tesco is seeking stores of 12,000 to 15,000 square feet, a size that places it in direct competition with Dallas-based 7-Eleven, Matt Heslin, a real estate developer who leased Tesco one site in Los Angeles and is negotiating three other deals, told Bloomberg. 7-Eleven CEO Joseph DePinto told the news agency, We're really trying to differentiate into a broader area of convenience. I think their approach to how they want to go to market is going to be much different to the way we do.
The Tesco concept may encroach on the territory occupied by Aldi Group's Trader Joe's, the report speculated. Monrovia, Calif.-based Trader Joe's specializes in imported cheeses, wines and artisan breads, with stores decorated in a South Pacific theme. The company, which has 255 outlets in 22 states, has told store managers to keep their eye on the ball, said Richard Carlson, manager of the Trader Joe's in Irvine, California. Michael Stephen, an assistant manager at Trader Joe's in Riverside, said a headhunter for Tesco contacted him at work.
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