PHOENIX -- From distribution prowess to knowing exactly who they're selling to, executives from the U.K.'s largest retail grocer are taking their plan to enter the United States next year seriously. And as it became known this week that Tesco's entry into the Phoenix market won't be with a whimper, but with a roarthe company plans to build or renovate 50 stores by fall 2007retailers are taking serious notice.
I can't emphasize how dramatically [Tesco is] going to change our business, the president of a small West Coast chain told CSP Daily News on condition [image-nocss] of anonymity. It's especially going to hurt the smaller operators, so we need someone to slap us in the face and wake us up. If we don't change to meet [Tesco], we're going to die.
News of Tesco's ultimate plans for the United States has leaked out in drips. Early this year, the company announced its plans to enter the U.S. market on the West Coast with a new convenience store format and a $470 million annual budget. So far, it has become clear the company has its eyes on Los Angeles, Las Vegas and the Phoenix market.
According to the Business Journal of Phoenix, Tesco PLC officials hop on a bus and tour metro Phoenix every couple of weeks to check out potential locations. Paul Katsenes, deputy director of community and economic development for the city of Phoenix, told the newspaper the company has proposed building/renovating up to 100 stores.
We think they'll come to us any minute with sites, Katsenes said. We know they want to open all [the first 50] about the same time. The company has asked the city for help getting through the development process. While Katsenes did not know the name Tesco plans to use to brand its stores, the name Fresh & Easy has been floating around real estate industry circles.
Tesco's Phoenix concept is to provide the convenience of a Circle K or 7-Eleven, while offering fresh and prepared foods, such as those found at Trader Joe's, Whole Foods or Sprouts. The genius in Tesco is that they have a lot of private labels, lots of fresh produce and meat, and they'll be in smaller stores, close together, Katsenes said.
While it's well-known that Tesco sent employees to the Los Angeles market in 2005 to scout sites and confer with area residents, details of those excursions were unveiled this week in a Sunday Times story. According to the report, for two weeks 50 senior Tesco directors and researchers lived with families on the West Coast. Their mission: to understand the American way and how best to exploit it.
The Californian familieswho were recruited by a market-research firmhad no idea who the strange Brits were or why they were so interested in how they lived. Nevertheless, they invited them into their homes, where over the next fortnight the visitors kept a diary detailing their hosts' eating habits, shopping routines, even excursions for recreation or entertainment.
Spending time with people in their houses, looking in their cupboards and fridges and actually shopping with them is a great way to understand the market, said Lucy Neville-Rolfe, company secretary and corporate affairs director at Tesco.
The information that the Tesco snoops garnered was fed back for the personal attention of Tesco's chief executive, Sir Terry Leahy. It was the ammunition for his imminent assault on America, according to the Times report.
Leahy commissioned the US research to gain an insight into the psyche of West Coast Americans. Tesco carried out similar exercises in China and Japan before invading their markets.
Tesco's U.S. research did not stop at just shopping with consumers. In east Santa Monica, away from the beaches and tourists, Tesco constructed a dummy store within a warehouse. More than 200 focus groups have toured the store, providing feedback. From what I hear, the ready meals are to-die-for. And Californians are wealthy and busy enough to try them all out, a member of the Santa Monica Chamber of Commerce told the newspaper.
Retail experts are mixed in their opinions on the breadth and depth of success Tesco can expect. While many agreed it is a highly successful company in the U.K. with a good reputation, entering the U.S. market, especially in the West, could be a gamble.
Ted Taft, a retail consultant with Meridian Consulting Group in Westport, Conn., told the Business Journal that Tesco is offering a niche concept, which, by its nature, has limits, and it lacks the critical mass it has in the U.K. to operate convenience stores. When big grocery stores consider opening convenience stores, they find out it's too expensive, with the smaller space and less traffic, Taft said. It's difficult to supply fresh produce to lots of little stores, and Tesco doesn't have the infrastructure in place to do so. Pricing [in grocery stores] is so brutal that when competing with the Fry's and the Safeways, the [profit] margin is razor thin, he said.
Will Anders of the industry consulting firm McMillan-Doolittle LLP in Chicago, told the Business Journal he questions the move to the West because it is so far from the U.K. Also, he said, it's quite expensive from an advertising standpoint because the area is so spread out. It's tough for anyone to come into the U.S. Our market is different, and our competition is different.
Still, Anders said, West Coast consumers probably are more amenable to the Tesco concept. Their lifestyle is more progressive in accepting fresh food, he said. Like Trader Joe's, Tesco is likely to be banking on word-of-mouth advertising, Anders added.
Meanwhile, a foodservice consultant told CSP Daily News that Tesco's real strength remains in its distribution. [Tesco] has really figured out distribution, Lou Cooperhouse, president and CEO of FoodSpectrum LLC, Martinsville, N.J., said. That is Tesco's distinct advantage. Retailers from the U.K. have mastered sandwiches with a two- to three-day shelf life, with 5% spoils. In the U.S., I think if we had 20-day shelf life, we couldn't get 5%. Tesco doesn't know the marketplace, but they know America's greatest problem: distribution.
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