LONDON -- Calling its venture into the United States a launch, not a trial, Tesco has set aside a cool $3-billion cap on the amount of capital it is prepared to sacrifice as it prepares to make the move.
If it is a failure with consumers, you have got to be prepared to pull the plug, and we would move fast, but you don't go in with that view, Andrew Higginson, Tesco's finance and strategy director, told The Business, a U.K. business magazine.
This is a launch, not a trial, he said. The way we see this is it is an investment: If [image-nocss] we create a success, it will be something we can roll out that will create billions of pounds in value. But if not, the business [Tesco] can sustain a loss of 1.5 billion [$3 billion U.S.] in terms of failure; our careers might not, but the business would.
Tesco, the world's third-largest food retailer, plans to open 200 Fresh & Easy convenience stores in North America starting this year. And the company said it has also decided that it would move quickly to close down its entire store network in America if performance does not eventually match targets, said the report.
This is the first time Tesco has put a figure on the amount it is prepared to lose if its attempt to crack the historically difficult American retail market fails. This will provide comfort for investors indicating a clear commitment not to sink endless capital into the venture, according to the report.
Investors were surprised at the $130 million in startup costs that Tesco revealed earlier this year, which they were expecting to be closer to $40 million.
America has been a graveyard for many European retailers. Holland's Ahold, Sainsbury's Shaw and Marks & Spencer's Kings all struggled, dwarfed by the market leader Wal-Mart.
Higginson also ran through more details about the Fresh & Easy concept. We have been trying to unveil the concept, but it is a balance of keeping a few tricks up our sleeves for when it opens and releasing enough information to ensure interest from local communities and neighbors, Higginson told the magazine. The concept will catch the green wavethere is a lot of fresh, high-quality produce and meal solutions. There is not a big ready-meal market in America, so we will have to see whether they like that.
He added that the company is positioning its U.S. stores in between America's Whole Foods Market, which does fabulous food unbelievably expensively, and Wal-Mart, which is as you would expect. We want great quality and price.
That fits assessments made by U.S. foodservice and grocery experts who recently weighed in on the issue. Retail consultants from McMillan Doolittle recently reported that they expect the Fresh & Easy sites to be somewhere in between Whole Foods and Trader Joe's. Thus, the consultants, as cited by Ron Paul, president of retail research company Technomic, during a recent CSP Foodservice Category Review Meeting in Chicago, say Tesco's appropriation of the term convenience store needs to be considered differently.
The word convenience' has a different connotation in the U.K. and refers more to a shopping occasion than a format, Paul said during the meeting, referencing McMillan Doolittle's research. We expect for consumers to be able to complete a full grocery shop [at those stores], from dry goods to perishables to prepared products.
As for Technomic's take on the stores, Paul said the sites will be a different kind of store than we've seen [before]. There will be a heavy emphasis, but not complete emphasis on prepared foods.
Meanwhile, Tesco has continued to test products and retail concepts in its model store, hidden within a warehouse, on consumers. Higginson told The Business he has been pleasantly surprised by the reaction of consumers and also noted that Tesco's American shareholder base has almost doubled, leaping from 17% to 28%.
Also, Fresh & Easy will not have any reference points to its parent's heritage, according to Higginson. Tesco means nothing in California, he said. We are about local business for local people. There is no point in being some quirky British thing landing in California.
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