EL SEGUNDO, Calif. -- In 2007, as it rolled out ambitious plans to break into the U.S. market, British retailer Tesco PLC emphasized the high-quality foods at its Fresh & Easy Neighborhood Stores Inc. grocery/convenience stores; 15 months, 114 stores and a deep recession later, the company has made big changes to its strategy: steep price cuts, aggressive advertising and a new budget brand, reported The Wall Street Journal.
Tim Mason, president and CEO of Tesco's U.S. business, told The Times last week that its early market research was mistaken [image-nocss] and it may make big changes to the stores. "We may have assumed that certain elements of the Fresh & Easy brand would do the work for us and we would not have to go down and dirty on price. That may have been a mistake," he said. (Click here for previous CSP Daily News coverage.
Tesco always expected tough competition, but it did not foresee that its expansion would dovetail with a deep downturn in consumer spending, said the report. "The world is a very different place now," Mason told the Journal.
So the supermarket chain now woos customers with 98-cent fruit and vegetable packs and "Everything under $1" displays. A recent flier said, "A financial crisis shouldn't mean a dinner crisis."
How Tesco copes with the American economic crisis is being closely watched by rivals and investors, the Journal said. Competition in retailing is so fierce that Tesco disguised its first test store in California as a movie set to throw off snooping peers.
The retailer is joining the ranks of companies whose grand plans have been disrupted by the downturn, said the report. California, Nevada and Arizona, where Fresh & Easy operates, have been hit hard by the recession, with unemployment soaring and home foreclosures at a record.
Tesco's response to the recession includes its "Buxted" line, a budget brand in the meat aisles of its stores with black and brown labeling. The Buxted Value Chicken Breasts include some bone and rib meat, so they aren't trimmed to the same standard as the store's Fresh & Easy Chicken Breasts, but at $2.99 a pound, they cost $2 less. Buxted pork chops, tuna steaks and ribs are also cheaper, the report said.
As a next step, Mason is considering adding bread with preservatives, which is cheaper than the purer but pricier breads now in the store, he told the paper.
Tesco is also introducing aggressive price promotions involving selected products. Its initial strategy was to offer what retailers call "Every Day Low Price"-in Fresh & Easy's case, prices that were 10% to 25% below those at regular grocery stores. Now boldly colored shelf signs point out the "extra low price" on individual items, while large ceiling boards boast of "budget prices." Fliers that once focused on themes now push the latest special discounts.
To boost its low-price credentials in the Los Angeles area, Tesco recently changed its advertising strategy and ran radio commercials promoting $9.99 Valentine's Day bouquets. Before, the retailer used only fliers, the Internet and direct mailings for marketing messages. "What we are learning in this market is that 'Every Day Low Price' is not that interesting," said Mason. "People are buying on deal."
The Fresh & Easy stores generate an average of $11 a square foot each week, said the report, which is higher than the industry average. But Tesco's expansion is going more slowly than planned. By now, the company wanted to have 200 stores in the West, but it does not expect to reach that goal until November, the report said. For three months last year, it stopped opening stores altogether. A planned move into northern California, which requires a $100 million investment in a new distribution center, has been postponed.
Critics say Tesco's problems in the United States go beyond the current downturn. "The U.S. expansion is not performing up to expectations," said a recent research report by J.P. Morgan cited by the Journal. "The company is blaming the economic recession, but F&E is positioned as a limited-range soft discounter, selling only food, a format that should be relatively immune."
Mason responded that Tesco plans a long list of improvements. Recently, Fresh & Easy even changed the look of its stores, repainting walls in friendly pastels and adding a warm brown to the concrete floors after shoppers said the stores looked too sterile.
Fellow international transplant Famima has gone through a similar process. The company, a subsidiary of Japanese convenience store operator FamilyMart, said last year that it was making its U.S. West Coast-based stores "more Americanized." The company initially aimed to attract American consumers with Japanese products, including "bento" boxed meals and "onigiri" rice balls. But the company has come to realize that it has to offer a wider variety of more familiar, traditional U.S. fare. (Click here for previous coverage.)
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