EL SEGUNDO, Calif. -- Tesco Plc faces an "ultra-competitive" market as it prepares to enter the United States and, while its initial impact on rivals is likely to be minimal, retailers and investors need to pay attention to its plans, Credit Suisse analyst Edward Kelly said on Wednesday, according to Reuters.
In a note entitled "It May Be Fresh, But It Won't Be Easy," Kelly said Tesco's plans to open U.S. stores "could represent one of the major structural changes to face the retail industry in some time."
Last week, Tesco, Britain's [image-nocss] biggest retailer, said it would initially target the greater Phoenix area, Las Vegas, Los Angeles and San Diego for its new U.S. stores, to be called "Fresh & Easy Neighborhood Market."
The stores, which are smaller than supermarkets or mass market stores, but larger than typical convenience stores, are to start opening later this year. Tesco confirmed last week that its stores would be just 10,000 square feet, making them much smaller than a traditional 45,000-sq.-ft. grocery store.
While it should take time for Tesco to test and perfect its model before moving beyond its initial areas, "retail competitors and investors need to consider the ramifications now," Kelly wrote. He estimated Tesco's Fresh & Easy stores could generate $1 billion in sales within three years and grab 2% to 6% of local market share in five years.
But Tesco will have to differentiate itself from existing chains to grab consumers' attention, Kelly said. He believes Tesco's U.S. stores will be a hybrid, bridging the gap between traditional grocers, such as Kroger Co. and specialty supermarkets such as Whole Foods Market Inc. and privately held Trader Joe's, while adding the appeal of mass market stores, such as Costco Wholesale Corp., Target Corp. and Wal-Mart Stores Inc.
Kelly said Tesco's growth would likely accelerate after its second year in the United States and it could look at acquisitions to move into attractive locations. He added he believes some retailers are working on possible responses to Tesco's arrival, such as new store formats or upgrades to their existing formats. "It's too early to short supermarket stocks," Kelly wrote. He expects supermarket earnings to remain solid in the near term, but said "investors with a longer term time horizon should not overlook this potentially large negative catalyst."
A Financial Times report added that Tim Mason, head of Tesco's U.S. operation, said the stores, located close to high-density housing, had been designed to draw customers back to their local neighborhoods and will offer a focused selection of fresh and packaged food in an easy-in-easy-out format.
Tesco has yet to say how many stores will be in its first wave of openings; however, it has applied for licenses to sell alcohol in more than 40 locations in the three states, the Times said
About half of the facade of the new Fresh & Easy stores will consist of a green panel surrounding high windows, according to plans seen by the newspaper. Tesco's enthusiasm for the color out-greens both Whole Foods Market and Wild Oats, the report said.
Green also dominates on Tesco's www.freshandeasy.com U.S. corporate website, it said, and colors the new business cards of its U.S. executives. Also, Tesco has opened a career website www.careersatfreshandeasy.com.
Tesco said the U.S. store format is dedicated to environmentally friendly business practices. It is adding solar panels to some of its stores and it has announced plans to build a $13-million solar panel array to provide power for its distribution centre being built in Riverside, Calif., which is believed to be the world's largest.
At a store level, waste will be minimized by recycling or reusing all shipping materials and energy consumption will be reduced with modified fridges and lighting, the company said. And in what may be an optimistic gesture, some of its stores in car-obsessed Los Angeles will feature bicycle racks by the main entrance, said the report. Sir Terry Leahy, Tesco's CEO, last month set out ambitious targets for the retailer on carbon emission transparency and other issues, noting that the U.S. operation is also placing a big emphasis on reducing energy and carbon emissions.
Tesco's stress on sustainability mirrors a similar push by Wal-Mart, the largest US retailer, which is seeking proposals for a potentially massive solar power project covering stores in five states. Whole Foods, Staples and Walgreens are also pursuing solar power initiatives at their stores.
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