UNITED KINGDOM -- Yesterday's announcement that U.K. supermarket giant Tesco PLC plans to plant its own red, white and blue flag on U.S. soil in 2007as reported in a CSP Daily News flashbeginning with convenience stores on the West Coast, represents a new strategy in supermarket chains with c-store branches.
According to industry expert Gerald Lewis, Tesco's twist on c-stores at its Express sites is that it sells a full line of supermarket-quality groceriesperishables, produce, meatthat overcomes two obstacles that traditionally keep groceries from selling [image-nocss] well in c-stores: high prices and lack of trust.
With its buying power as the U.K.'s leading grocermore than 2,300 stores, including 800 Express sites, in 13 countriesTesco can hold down prices in its Express stores while cashing in on its well-respected name.
U.S. supermarket chains that have gotten into c-stores have done it wrong, Lewis, a former U.K. resident, told CSP Daily News. They've basically built convenience stores, and most of them, in spite of the fact that they've got huge buying power in the grocery business and they have the logistical expertise, they don't want to deliver to little stores. They like to deliver a whole tractor-trailer load of stuff, have it pull up to a dock and empty it out at one store.
Lewis, however, said the company does come to the United States with one big strike against it: Nobody knows the name Tesco on the West Coast, he said. If it was Lucky Express or Safeway Express, that would be one thing.
Neil Saunders, director of consulting for Verdict Research, a U.K. research firm, agreed, noting, The company will need to work hard in establishing Tesco's credentials; it is virtually unknown in the U.S.
Ultimately, most analysts and consultants feel the move is an effort by Tesco to go head to head with discount giant Wal-Mart, and Lewis said he found it fascinating that Tesco would choose to enter the United States with a c-store format. It could be a means of getting into (the U.S.) market without fighting Wal-Mart, he said.
Again Saunders agreed, noting that "it is eminently sensible for Tesco to develop organically. Tesco doesn't want to be burdened by the problems of a company it takes over nor does it want to be encumbered by stores which are unsuited to its operation. This route will allow the company to manage its capital expenditure and learn from experience as it expands store numbers.
He added that c-store consumers are more likely to try new store setups and brands, as well.
Meanwhile, a Canadian analyst who spoke on condition of anonymity because of company policy told CSP Daily News, I thought it was interesting that they were not talking about acquisitions. If this is a short-term strategy to build groundups to run test markets, that would make sense.
If Tesco shuns acquisitions, the question remains whether it can build sufficient density to carve out a core niche in the convenience market. Also important will be its ability to adapt to a market that may be quite different than England's.
Tesco CEO Terry Leahy said the move is the culmination of much due diligence. Tesco estimates the U.S. grocery market worth at $600 billion per year and will grow 40% in the next five years.
"It is a market we have researched extensively for many years, and over the last year, we have committed serious resources to developing a format that we believe will be really popular with American consumers, he said. We know we can't just transplant the U.K. model or copy other models that are already there. The U.S. is a very large market to grow into, and you're allowed to grow therethere are no restrictive planning laws.
Tim Mason, currently marketing and property director, will move to the United States to run the business, remaining on the board.
Tesco's reported U.S. budget is comparable to what Canada-based Alimentation Couche-Tard, North America's second largest convenience chain, has allocated for acquisitions. In addition to food retailing, Tesco offers nonfood sales, a retail website and personal finance and telecom services.
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