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RETAIL VIEW: Questions remain as industry gets ready for Tesco invasion

For the past year, there have been abundant rumors, industry speculation and even movement from Tesco confirming that this giant European-based grocery retailer is coming to the United States.

In fact, the name of the retailer's U.S. chain is now known (though not confirmed) and many locations have been identified.

The company has disclosed very little official information about its foray into the U.S. market, and no one from the company was available to be interviewed for this story. A Tesco spokesperson in the United Kingdom said that any information would have to come from the international department and then said that the international department is unavailable for comment. "I'll be happy to pass your name on so that you can be notified when they are ready to say something," the spokesperson told The Produce News in mid- January.

As of the end of January, no notification had been received. The company has opened an office in Southern California, but no one answered repeated calls to the number and there is no answering machine.

But this much is known -- or is at least what everyone thinks is happening with Tesco.

Tesco is expected to open as many as 300 stores in the next couple of years in Southern California, Nevada and Arizona. The company is currently doing business as Tesco Stores West Inc. in Upland, CA, and is applying for liquor licenses at multiple locations throughout Southern California under that name. Those public records reveal that the locations of the first wave of stores appear to be heavily concentrated in Southern California's Inland Empire, 40-80 miles east of Los Angeles.

That makes geographic sense because Tesco bought an 88-acre parcel in Riverside, CA, which is the announced location of its distribution center serving this market. It began grading the site at the end of last summer and is expected to open the facility in mid-2007.

Tesco had previously announced that it would enter the United States in 2007, developing a "completely new format" of convenience stores geared specifically toward the American consumer. In the company's annual report for 2006, it said it would be a "local format" headed by Tesco veteran Tim Mason, who has moved to the United States.

It is known that Tesco operated a "dummy store" within the Los Angeles area for several months doing market research before announcing its plans. Mr. Mason has told The Los Angeles Times that the company is looking to locate in "underserved" urban areas. It is has been theorized often that Tesco will be competing against conveniences stores such as 7-Eleven Food Stores. But many who have observed Tesco in Europe and around the world believe the new stores will also offer local supermarkets a run for the consumer's money.

The British Broadcasting Corp. recently ran a story stating that Tesco has chosen "Fresh and Easy" as its brand name for its U.S. stores. The format, according to Tesco, will be based on the company's successful "Express" retail outlets, which feature a lot of packaging and a lot of prepared foods.

Warren Buffet's Berkshire Hathaway investment group, which is known to be a savvy investor, has purchased 177.8 million shares of Tesco in anticipation of its entry into the U.S. market.

Tesco has begun to staff its U.S. operation. It has hired a produce buyer who was previously with Ralphs Grocery Co., and company representatives have also begun to attend produce industry events and accept sales calls from product representatives.

In fact, a refrigerated branded salad dressing manufacturer claims it was the first North American supplier to call on the supermarket's California offices. However, it was not a fruitful call, as Tesco indicated that it was considering private label for that type of product. That would be consistent with other information coming from Tesco indicating that it will bring some of its United Kingdom suppliers with it to the United States.

Apparently, two of those grocery suppliers are currently building or buying warehouse facilities in the vicinity of Tesco's Riverside distribution center. According to industry analysts, the average Tesco is expected to be only around 15,000 square feet -- one-third of the size of a typical Southern California supermarket but larger than most 7-Elevens, which are typically about 3,000 square feet.

Real estate experts said locations that can accommodate 15,000 square feet are relatively plentiful, giving Tesco a lot of different options. In fact, Tesco's Mr. Mason recently told the San Diego Union-Tribune that the firm was scouting 600 different locations in Southern California, settling on at least two specific locations in the San Diego area. Liquor license applications reveal that the firm has at least a dozen specific locations locked up.

One produce industry retail expert who wished to remain anonymous told The Produce News that Tesco's success in the United States would hinge on how quickly it adapts. He said that the company can come into the arena with all the research it wants and all the preconceived notions that it has, but to survive it will need to adapt to the specific environments in which it finds itself. He said that with 300 locations, the chain would be serving many different demographics, income levels and ethnicities, since Southern California is not a homogenous market where one size fits all.

Grocery industry pundits from around the country have expressed a wide variety of opinions on industry chat web sites concerning Tesco's potential success.

Laura Davis-Taylor, founder and principal of Retail Media Consulting: "Can they do enough to be different? It seems like bringing this approach to underserved markets is a great idea ... at least until other competition appears. Will their loyalty program and prices create something truly unique? It's going to have to. My gut tells me that they have something up their sleeve that will surprise us all."

James Tenser, principal of VSN Strategies: "I'll go out on a limb and ask if Tesco's description reminds anyone else of Trader Joe's? Small footprint. Neighborhood locations. Fresh and prepared foods emphasis. Heavy on store brands. Specialized distribution system. This is a play for wallet share focused on lucrative trip types. Could be a brilliant stroke by a smart organization that is entering the U.S. market with a blank slate and deep pockets."

Dean Crutchfield, vice president of marketing of Wolff Olins: "This is America, where competition is king. And this is Tesco, the one retailer even Wal-Mart admires. They are a spectacular, efficient operation -- lean and mean -- and they are a brand. Question is, will they be able to build brand permission here?"

David Livingston, principal of DJL Research: "The only thing that has gotten my attention is they want to build 300 stores. All the rest sounds like canned hype that boils down to 'if we build it, they will come.' They make it sound like it's going to be so easy. Almost to the point of being naive."