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Tesco - USA
Opening Thoughts

Ian MacLaurin (1999) Past CEO Tesco

When I was the chairman of Tesco we looked very carefully at the North American
market, and found that there was a significant difference in cultural attitudes to shopping
over there. In the UK the development of own labels has been very strong indeed,
whereas in the States, customers are very brand-oriented, and tend to regard own
labels as inferior products. It's a nonsense, of course, but as Sainsbury's and M&S have
learned, it's a difficult job to change established mindsets, which is one reason why, after
examining the situation in detail, we turned our face absolutely against going into the US.
Extracted from Ian MacLaurin (1999) Tiger by the Tail: A Life in Business from
Tesco to Test Cricket Basingstoke: Macmillan p 107

BBC NEWS October 2006

Tesco Makes 1.1bn in Six Months

Tesco is moving into the US as its foreign expansion
continues. UK Supermarket giant Tesco has seen its
half-year profits rise 10.3% to 1.09bn, helped by
international sales. The group saw its overall sales
rise 12.7% in the six months to 26 August, with
profits at its overseas businesses rising 21.1%. Meanwhile its online venture
Tesco.com showed further growth, with its profits up 43.1% in the period as
customers tapped into home shopping. Tesco sales are growing three times
faster outside the UK than within the UK. By the end of August, Tesco had
949 outlets outside the UK, including 370 hypermarkets. The Czech Republic
and Asian nations including China Japan, South Korea, Malaysia and Thailand
saw the largest expansion.

Case Study Compiled from a variety of sources by Dr. John Sutton

for Middlesex University Dubai Campus

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Tesco Moving into the US

The worlds third biggest retailer, Tesco,

has been open for business in the United
States since 2007, trading under the
brand name Fresh and Easy.

Tescos entrance into the US market was

a long time coming, with the company
studying US shopping habits for 20 years. The team even sent out
researchers to live with 60 American families for two weeks to discover the
products they bought and they food they ate.

Tesco to enter United States The Times 09/02/2006

Tesco PLC today announces that it intends to enter the United States through
the development of a new convenience format, beginning on the West Coast
in 2007.

The development of the business will be through organic growth, with

initial planned capital expenditure of up to 250 million per year, which
will be funded from existing resources, with break-even expected by
the end of the second full year of operation. Tim Mason, currently our
Marketing and Property Director, will move to the US to run the
business, remaining on the PLC Board.
The new format is designed for the American market, following
extensive consumer research and modelled on Tescos highly
successful and innovative Express concept, which we now operate in
five countries, with over 800 stores serving around eight million
customers every week.
International growth forms a key element of Tescos four part strategy
and the business currently trades in 12 countries outside the UK,
mainly in Asia and Central Europe. Over half of Tescos selling space is
now outside the UK. Todays announcement represents a strategic
move into another developed market, complementing our entry into
the emerging Chinese market in July 2004. It will allow us to build our
position in the worlds largest markets, and brings the population of
markets we operate in to 2.1 billion people, contributing over 55% of
global GDP.
"This is a tremendously exciting move for Tesco which will add a
new leg to our international expansion. The United States is the
largest economy in the world with strong forecast growth and a
sophisticated retail market. 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
Case Study Compiled from a variety of sources by Dr. John Sutton
for Middlesex University Dubai Campus

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believe will be really popular with American consumers. Weve

put a strong team together, led by Tim Mason and drawing on
the wealth of skills and experience within the group. The first
stores will open on the West Coast in 2007.
Tesco Former Chief Executive, Sir Terry
Leahy
Tesco, with the majority of its profits being derived from the U.K., misjudged
the level of ease at which their stores would translate into U.S. markets. For a
six-month period ending in 2010 the company reported trading losses of
$151m and they temporarily closed several stores due to market conditions. 1
Tesco is showing faith in the (currently) loss-making chain by announcing a
store opening spree in northern California.
Priding itself on offering gourmet-style produce, Fresh and Easy launched
before the credit crunch, branding itself around the trendy theme of
environmental awareness - the stores are painted green and there is parking
for hybrid cars along with bike racks. Its new distribution centre in Riverside
in California - where it makes its salads and ready meals - has one of the
largest solar-paneled roofs in the US.

Tesco UK

Fresh & easy USA - It doesn't

look like a Tesco on the outside

Britons abroad hoping to stock up on Branston Pickle and Marmite will be

disappointed - the stores are designed for American consumers. Tesco thinks
it has got it right sales formula: the stores aim to cater for time-starved
shoppers who want fresh, healthy food - including ready meals - at
affordable prices. The company is promising to locate some of its outlets in
areas that desperately need them. Many low-income, high-poverty areas
have become so-called food deserts: areas that lack access to fresh,
healthy, affordable food.

Case Study Compiled from a variety of sources by Dr. John Sutton

for Middlesex University Dubai Campus

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The idea of restricting choice is also a very interesting innovation. Fresh &
Easy have modeled their west coast outlets on the 800 Tesco Express stores
in Britain. Each outlet employs between 20 and 30 people and is much
smaller than the typical US supermarket. This will help minimize competition
with giant US retailers like Wal-Mart (Asda in Britain).
Tesco has made a sizable investment into the strategy. The plan was to spend
around 800m between 2007 and 2010 before achieving breakeven. It hasnt
quite got there yet. According to The Guardian the failure to crack the US
market is the one blot on the copybook of former chief executive Sir Terry
Leahy.
The business is now not predicted to break even until the financial year
2012/13 and the number of store openings still lags well behind the target set
when it entered the market in 2007. Last year it announced plans to mothball
13 stores in Nevada and Arizona because of the severity of the sub-prime
property crash. The chain made a loss of 95m on sales of 247m in the six
months to 28 August 2010. But maybe the tide is turning.
According to the head of US operations: We opened our first stores in 2007
with the goal of creating a modern, 21st-century grocery store. Fast forward
to today, and we have 166 stores and more than 4,500 employees. He
added that the extra store openings would bring welcome volume to the
factories and help to reduce the start-ups heavy overheads.
But ambitions have scaled back, a bit. The outgoing Tesco boss hinted at the
possibility that the chain could end up being hundreds rather than
thousands of Fresh & Easy stores. It may be a while before the size of the
US operation reaches the scale it has achieved in the UK.
When Tesco recently announced its worldwide financial results, there was
little surprise that its group profits were up 12%, to 3.8bn in the year ending
in February.
But there was one region of the world that bucked the trend. The US was the
only blot on its copybook, posting a loss of 186m.
Tesco's first US store opened in Los Angeles in 2007 and it has 175 now, all
near the west coast, in California, Nevada and Arizona.
They go under the name Fresh & Easy, selling "wholesome food that doesn't
cost your whole pay check", according to the website.
The basic message is that it's fresh, healthy and inexpensive, which is
underlined by the look of the stores.

Case Study Compiled from a variety of sources by Dr. John Sutton

for Middlesex University Dubai Campus

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In size, they are somewhere between a Tesco Metro and the big Tesco
supermarkets, and the colour scheme is very green, from the leafy logo to the
T-shirts worn by the staff, and is even the colour of choice for the world and
inhabitants in its promotional video.

What Has Gone Wrong?

Allowing for the fact that economic conditions in the US since its launch have
been very difficult, what else has gone wrong?
Setting aside whatever one-off costs they may have incurred, the decision to
go into the US and go under a different brand name offers great challenges
for a retailer that's all about value, he says. The European brands that
succeed in the US tend to be at the luxury end, like Jaguar and Ferrari.
With business that have 'international' on the agenda when America comes
up the executives' eyes light up because they think; 'big market, similar
language, they've got money, we'll be rich'. But it's not that easy. Just
because you want to go there doesn't mean they want you there or, more to
the point, they need you there."
One of the reasons behind Tesco's success in the UK was its use of consumer
data garnered from loyalty cards, but applying the same logic to any market
might not be enough. Tesco, which says it has created 4,500 US jobs, isn't the
first British retailer to find the American market a tough one to crack. Marks
and Spencer has made two forays into the US, and had its fingers burnt. In
1988, it bought the 155 stores of fashion retailer Brooks Brothers, but sold
them for a third of the price in 2001. It also sold its Kings supermarket chains,
based in New Jersey, after losses.
But Tesco says it has learnt to adapt, and one change it has introduced that
perhaps reflects the subtle difference in consumer habits in the US is to open
an hour earlier so customers can pick up fresh coffee on their way to work.

Katie Carter Shopper, San Jose, California

I shop at the newly-opened Willow Glen, San Jose store and absolutely
love the convenience, cleanliness, helpfulness of staff, and overall
attempt at doing something new to shake up our shopping experience.
My view of their real problem is that they're not doing enough
marketing or advertising to get people in the stores. I see a lot of
Facebook and social media attempts to get people in the door, but
nothing on TV - what most Americans do all day - and nothing in a
weekly supermarket mailer that we're forced to receive.
Case Study Compiled from a variety of sources by Dr. John Sutton
for Middlesex University Dubai Campus

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Tesco spent 10 years preparing for its US launch and it

has done its homework
I think they applied the theory correctly but they failed to persuade people
to come through the door. They've identified the West Coast as that's more
likely to go down the healthy eating route - a fresh fruit and veg model, which
is much more what the UK supermarket experience is based on. The brand
awareness hasn't worked and if you don't get that right then you can't get
money out of people's pockets. They also might be losing some of the
passing trade they enjoy in the UK, because more Americans drive to
supermarkets.
US Retail expert George Godber

Trevor Datson, Tesco's group media director, says Fresh & Easy is giving
Americans something new.
"Fresh food at exceptional prices, and fresh meals from the Fresh &
Easy kitchen, all of a quality which is unprecedented; the food is made
on our own premises. The research proves that customers like it, but
there havent been enough of them yet."

Tesco says the losses, up from 165m in

the previous year, are down to two things
- the cost of merging two suppliers and an
unfavourable exchange rate.
"We expect losses to reduce sharply
strong growth in like-for-like sales
store operating ratios start to deliver
profitability," says the Tesco financial
the business will break even in 2013,
hopes to have 300 stores.

in the current year as

continues and improved
individual shop-door
report, which estimates
when it

But Tristan Rogers, CEO of Concrete, a UK-based firm

which advises retailers on international
expansion, questions whether Fresh & Easy
provides Americans with anything they
already have.

don't

"Tesco isn't a brand. It's a recognised name but not a brand in the
sense of being defined by its product - it's defined by price and
Case Study Compiled from a variety of sources by Dr. John Sutton
for Middlesex University Dubai Campus

Discussion Questions

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convenience. And price and convenience is what the Yanks do better

than anyone else.

1. "Why does Tesco think it can succeed in the US?

2. Is there a gap in the market?"
3. Tesco might be one of the world's largest retailers, with profits in the
billions, but it's not having everything its own way. The US stubbornly
refuses to fall for its charms. Why? What went wrong?
4. Discuss and identify some of the issues associated with global
expansion and entry into a new market?

Case Study Compiled from a variety of sources by Dr. John Sutton

for Middlesex University Dubai Campus